Currency Management - Essay Example

Currency Management Affiliation: Economic activities undertaken at local, national, and international levels influence the economic decisions taken at every level. Domestic and international economic performance is influenced by exchange transactions among other variables that are central to economic operations within and without domestic borders. Among the notable economic decisions made by both domestic and international economies are dollarization and the formation of monetary unions (Douma & Schreuder, 2008).

These two are uniquely different in relation to the purposes they serve.Dollarization defines a situation where a foreign currency is domestically adopted for the purpose of conducting economic transactions. The foreign currency in the dollarization context serves as a medium of exchange, unit of account, and store of value (Honohan, 2007). Dollarization operates and functions within the geographical boundaries of the specific country that adopts it. Different countries can engage in dollarization and use the same foreign currency, but their decisions are independent and unrelated.

On the other hand, monetary union defines a scenario where two or more countries come together and agree to share a common currency. This means that all countries bound to the union uses the agreed upon currency to carry out economic transactions.Dollarization and monetary unions exhibit both advantages and disadvantages. For a small country, dollarization may be used to enhance the economic performance. However, the success of dollarization in the country that adopts the foreign currency may result in disregarded domestic currency by having the foreign currency replace it.

In the context of the global financial system, the strongest and most used foreign currency may dominate and outperform other currencies through overvaluation. The policy is, however, vital in nurturing economic relationships across the globe. On the other hand, monetary union improves the value of the chosen currency, making the countries bound to the union influential in terms of domestic and international economic transactions (Gerber, 2010). However, countries with poor economic performance can be dominated and “enslaved” by stronger countries in the union.

ReferencesDouma, S. W. & Schreuder, H. (2008). Economic Approaches to Organizations. New York:Financial Times/Prentice Hall. Gerber, J. (2010). International Economics. New York: Prentice Hall.Honohan, P. (2007). "Dollarization and Exchange Rate Fluctuations". World Bank PolicyResearch Working Paper (4172).