THE INTERNATIONAL MONETARY STABILITY ACT:

AN ANALYSIS

 

Paper for North-South Institute conference

“To Dollarize or Not to Dollarize?”

Ottawa, October 5, 2000

 

by Kurt Schuler and Robert Stein¹

 

            On September 9, Ecuador completed official adoption of the U.S. dollar as legal tender. Ecuador’s decision to become officially dollarized has added fuel to worldwide interest in dollarization.² The idea of dollarization moved from the fringe to the center of debate about the “international financial architecture” in January 1999, when Argentine president Carlos Menem announced that his country was considering dollarization. Argentina’s status as one of the largest emerging market economies eliminated what many people previously considered the strongest argument against official dollarization: that it was politically unthinkable. Ecuador’s experience shows that not only is it thinkable, it is achievable. Ecuador is in fact the second country to dollarize this year: East Timor did so on January 24 (UNTAET 2000).

 

            Interest in official dollarization is particularly keen in Latin America, notably in Argentina, Costa Rica, El Salvador, Guatemala, and Mexico. Official dollarization has appeal in the region partly because unofficial dollarization is already so widespread. Unofficial dollarization occurs when people use foreign currency extensively because they prefer it to domestic currency (typically as a store of value). It is estimated that roughly two-thirds of dollar notes (paper money) are held outside the United States, almost all in unofficially dollarized countries. Use of dollars unofficially also extends to bank deposits: in Argentina, Bolivia, Peru, and a number of other countries, deposits in dollars exceed deposits in domestic currency.

 

            A few countries have the next stage of dollarization, which might be termed semiofficial dollarization: they give foreign currency nearly equivalent status as legal tender with domestic currency. Montenegro is the latest to do so: on November 2, 1999, it made the German mark a parallel legal tender with the Serbian-issued Yugoslav dinar, which has experienced the world’s worst inflation over the last decade.

 

            Returning to President Menem, his initiative raised the question whether the United States should encourage, discourage, or be neutral toward official dollarization. Official dollarization occurs when a country adopts the U.S. dollar (or another foreign currency) as the predominant or exclusive legal tender. Only a number of small countries, of which Panama was until recently the best known, are officially dollarized today. Table 1 lists where different types of dollarization exist.

 

            Shortly after President Menem’s initiative, U.S. Senator Connie Mack set out to investigate the issues involved in official dollarization. The issues were of interest to him because of his longstanding interest in price stability. Before being elected to Congress he was a banker, and he saw how the inflation of the late 1970s hurt businesses. He also saw how inflation reduced the value of the fixed incomes supporting many retired people in his native Florida. Senator Mack has proposed legislation that would make price stability the main long-term goal of the Federal Reserve System (the Economic Growth and Price Stability Act, S.1492). Dollarization was a natural fit with his interests because it is a way of spreading the relatively low inflation the United States enjoys to countries where inflation has been much higher.

 

            Senator Mack chaired hearings exploring official dollarization on April 22 and July 15, 1999. The hearings were joint sessions of his own Subcommittee on Economic Policy and Senator Mike Enzi’s Subcommittee on International Trade and Finance of the Senate Banking Committee. The hearings, meetings with foreign officials, and staff research on dollarization convinced Senator Mack that it was in the interest of the United States to make official dollarization less costly for dollarizing countries. To that end, on November 8, 1999 he introduced the International Monetary Stability Act (S.1879). Rep. Paul Ryan of Wisconsin introduced a companion bill in the House of Representatives (H.R.3493) on November 18. On February 8, 2000, the Subcommittee on Economic Policy held a hearing on the International Monetary Stability Act (U.S. Senate 1999a, 1999b, 2000). Testimony at the hearing by the Assistant Secretary of the Treasury for International Affairs led Senator Mack to introduce a somewhat revised version of the Act (S. 2101) on February 24. The revised bill was co-sponsored by Senator Robert Bennett of Utah. On July 13, the full Senate Banking Committee passed by voice vote the revised version, which contains a further amendment introduced by Senator Mack. As of September, when this paper is being, written, the version passed by the Senate Banking Committee is the most current and it is the version that the paper describes.³

 

            The International Monetary Stability Act proposes to share with officially dollarized countries the seigniorage (profit) the United States earns from issuing the dollar. Except for the few small countries already officially dollarized when the act was introduced, the United States will not share seigniorage from dollars already circulating abroad; the offer applies only to seigniorage arising from increases in dollar circulation resulting from official dollarization.

 

            Because the Act is written in somewhat technical language, some of its features are not readily evident to the average reader. Our purpose here is to explain why the Act is designed as it is. Our analysis of the Act will for the most part proceed section by section.⁴

 

 

General considerations about the Act

 

            At least two reasons justify consideration of the International Monetary Stability Act now rather than later. First, with more countries considering official dollarization it has become more important to let them know where the United States stands on the issue of sharing the profit from issuing the dollar. The costs associated with uncertainty are greater when more countries are affected. Second, the Act will encourage countries to consider official dollarization during periods of relative stability rather than (like Ecuador) during periods of economic crisis. In turn, this will make it more likely that official dollarization will be successful when implemented.

 

            The Act establishes uniform conditions for certifying countries as officially dollarized and paying seigniorage to them. Another approach would be to pass dollarization legislation on a country-by-country basis. However, this approach suffers from several flaws. First, a dollarization bill dealing with a specific country would be a magnet for all issues related to that country. Second, one country might get a better deal than another, causing diplomatic problems. Third, if a country announced it would dollarize contingent on passage of a bill by the U.S. Congress, uncertainty about the passage of the bill could be destabilizing for the country’s financial markets. And fourth, a country-by-country approach would require time in many separate bilateral negotiations, as countries bargain for advantages the United States may or may not be willing to concede.

 

            The Act gives considerable discretion to the Secretary of the Treasury in determining how some features, particularly certification, are to be applied. The Secretary has this role because he is by tradition the chief official concerned with the international monetary policy of the United States. The Secretary rather than the Federal Reserve takes the lead on such matters; the role of the Federal Reserve in the Act is correspondingly small. Ultimately, laws must be executed by people. The Act trusts the Secretary to behave in a spirit consistent with it rather than imposing detailed procedures for aspects of the law other than the calculation of payments, where detail is most important.

 

Table 1. Dollarized Countries as of September 2000               Unofficially dollarized -- U.S. dollar: Most of Latin America and the Caribbean, especially Argentina, Bolivia, Mexico, Peru, and Central America; most of the former Soviet Union, especially Armenia, Azerbaijan, Georgia, Russia, and Ukraine; various other countries, including Mongolia, Mozambique, Romania, Turkey, and Vietnam.               Unofficially dollarized -- other currencies: French franc/euro -- some former French colonies in Africa; German mark/euro -- Balkans; Hong Kong dollar -- Macau and southern China; Russian ruble -- Belarus.               Semiofficially dollarized -- U.S. dollar: Bahamas, Cambodia, Haiti, Laos (also Thai baht), Liberia.               Semiofficially dollarized -- other currencies: Bhutan (Indian rupee), Bosnia (German mark, Croatian kuna, Yugoslav dinar), Brunei (Singapore dollar), Channel Islands, Isle of Man (both British pound), Lesotho (South African rand), Luxembourg (Belgian franc), Montenegro (German mark), Namibia (South African rand), Tajikistan (use of foreign currencies permitted -- Russian ruble widespread).               Officially dollarized -- U.S. dollar: Independent countries -- East Timor, Ecuador, Marshall Islands, Micronesia, Palau, Panama; Non-U.S. dependencies -- Pitcairn Island (New Zealand), Turks and Caicos Islands (U.K.), British Virgin Islands (U.K.); U.S. territories -- Guam, Northern Mariana Islands, Puerto Rico, American Samoa, U.S. Virgin Islands.               Officially dollarized -- other currencies: Independent countries -- Andorra (French franc, Spanish peseta), Northern Cyprus (Turkish lira), Kiribati (Australian dollar), Kosovo (German mark, Yugoslav dinar), Liechtenstein (Swiss franc), Monaco (French franc), Nauru (Australian dollar), San Marino (Italian lira), Tuvalu (Australian dollar), Vatican City (Italian lira); dependencies (all non-U.S.) -- Cocos (Keeling) Islands (Australian dollar), Cook Islands (New Zealand dollar), Greenland (Danish krone), Niue (New Zealand dollar), Norfolk Island (Australian dollar), Saint Helena (British pound), Tokelau (New Zealand dollar); territories with special status -- Kosovo (German mark).

Notes: The list of unofficially dollarized economies is not exhaustive because the extent of unofficial dollarization is hard to measure. An IMF survey based on data of foreign-currency deposits alone classifies 18 countries as “highly dollarized” as of 1995, meaning that foreign-currency deposits exceeded 30 percent of a broad measure of the money supply. The countries are Argentina, Azerbaijan, Belarus, Bolivia, Cambodia, Costa Rica, Croatia, Georgia, Guinea-Bissau, Laos, Latvia, Mozambique, Nicaragua, Peru, São Tomé and Principe, Tajikistan, Turkey, and Uruguay. The survey classifies as “moderately dollarized” another 34 countries, where foreign-currency deposits averaged 16.4 percent of a broad measure of the money supply. Those countries are Albania, Armenia, Bulgaria, Czech Republic, Dominica, Ecuador, Egypt, El Salvador, Estonia, Guinea, Honduras, Hungary, Jamaica, Jordan, Lithuania, Macedonia, Malawi, Mexico, Moldova, Mongolia, Pakistan, Philippines, Poland, Romania, Russia, Sierra Leone, Slovak Republic, Trinidad and Tobago, Uganda, Ukraine, Uzbekistan, Vietnam, Yemen, and Zambia (Baliño and others 1999, pp. 2-3).             Semiofficially dollarized countries are those that the IMF (1999) identifies as having foreign currency as “other legal tender,” meaning that foreign currency circulates widely but plays a secondary legal role to the domestic currency. A few other countries, notably Argentina and Bolivia, allow foreign currency a legal role but apparently not so extensive as in semiofficially dollarized countries, so the list omits them.

 

Why encourage official dollarization? (section 2(a) of the Act)

 

            Official dollarization has potential benefits both for countries that dollarize and for the United States. Currency crises in East Asia, Russia, Brazil, and elsewhere in recent years have been a wake-up call. Conventional approaches to handling monetary problems in emerging market countries have produced far too many disasters. The repercussions have been political as well as economic -- most notably in Indonesia, where a regime was toppled and the unity of the nation has come into question. The conventional approaches use a variety of exchange rate policies -- rigid pegs, crawling pegs, floating, exchange controls -- but all have in common a reliance on national central banks. Dollarization has attracted interest because it offers the prospect of avoiding the monetary problems that arise under conventional approaches.

 

            For dollarizing countries, the benefits of official dollarization flow from the dollar’s status as the most widely used and one of the most trustworthy currencies. One type of benefit is that official dollarization eliminates transaction costs with the United States and other countries that use the dollar. Official dollarization even reduces the transaction costs with other currencies. Large transactions between, say, the Mexican peso and the Japanese yen occur in two legs -- a peso-dollar trade and a dollar-yen trade -- because those markets are so big and efficient that using them is actually less costly than making a direct peso-yen transaction. Official dollarization eliminates one leg of the trade.

 

            Another type of benefit is that official dollarization would reduce inflation to single digits from the double-digit levels that now exist in some countries in Latin America and elsewhere. Because confidence exists that inflation in the dollar will continue to be low, it has low and relatively steady interest rates both in nominal and real terms. This encourages domestic savings, including a deepening of the financial system, as well as domestic and foreign investment. Official dollarization even has the potential to reduce interest rates that governments pay on their dollar-denominated foreign debt. Panamanian government bonds have had consistently lower and less variable yields than Argentine and Brazilian dollar-denominated bonds, for example. Because Panama is not noticeably more politically stable, it is hard to attribute the difference to anything other than that Panama is officially dollarized, while Argentina and Brazil are not.

 

            Besides having lower and steadier interest rates than many other currencies, the dollar has much deeper financial markets. For example, there are few other currencies in which private lenders offer 30-year mortgages at fixed rates of interest. Official dollarization can help individual borrowers and businesses achieve access to long-term finance at predictable rates, instead of relying on short-term finance at real rates of interest that may vary unpredictably from sharply negative to ruinously positive. Official dollarization eliminates currency mismatches for borrowers who have most of their assets in domestic currency but significant liabilities in dollars. Such currency mismatches caused waves of bankruptcies during the East Asian currency crisis as depreciations of domestic currencies against the dollar greatly increased the burden of debt in terms of domestic currency.

 

            A final type of benefit is that official dollarization promotes greater transparency in policy making. It eliminates currency crises and the rationale for exchange controls to support the exchange rate. By eliminating the government’s power to create inflation, it also fosters budgetary discipline. The government budget need not be balanced every year, but spending must be financed through the fairly transparent method of raising taxes or issuing debt rather than through the murky method of printing money.

 

            For a dollarizing country, the benefits of official dollarization are greatest if combined with financial integration -- opening the financial system to full participation by foreign institutions. Dollarization plus financial integration in effect make a country’s financial system part of the huge, liquid worldwide market for lending and borrowing in dollars. That strengthens the financial system by making it less vulnerable to local shocks, such as crop failures, earthquakes, and changes of government.

 

            For the United States, a potential benefit from official dollarization is increased seigniorage. We will discuss it below. More economically important is the potential for dollarization to boost long-run economic growth in the United States by boosting it in dollarized countries. The United States has more trade with Canada’s 31 million people than with Latin America’s 500 million people. Part of that results from most Canadians living closer to the U.S. border than most Latin Americans, but the high standard of living in Canada also contributes to extensive cross-border trade that benefits both countries by expanding the international division of labor. The experience of highly credible monetary reforms in countries as diverse as Argentina (1991), Bulgaria (1997), Germany (1948), and Japan (1949), indicates that they can provide a “confidence shock” that almost immediately moves economic growth to a higher level than was possible with a currency lacking credibility. Research by Andrew Rose (most recently Rose and Engel 2000) indicates that currency unification, such as dollarization provides, tends to increase trade both with countries using the same currency and with other counties.

 

            By increasing the number of countries that use the dollar, official dollarization would help the dollar remain the premier international currency, a status that the euro is now challenging. Dollarization by one or more large Latin American countries would significantly expand the number of people officially using the dollar, moving the population of the dollar zone ahead of the population of the euro zone for the time being.

 

            Finally, by eliminating currency crises in dollarized countries, official dollarization would reduce a source of instability that has at times roiled U.S. financial markets and disturbed patterns of trade. For example, complaints by American producers about foreign dumping of goods often arise because large unexpected devaluations temporarily make foreign goods much cheaper than they were before and correspondingly depress American exports. Official dollarization would eliminate these disruptions among countries that use the dollar.

 

 

Protecting against potential disadvantages of official dollarization (section 2(b))

 

            Whether a country should become officially dollarized is a decision for it alone. The International Monetary Stability Act does not reduce any country’s sovereignty, because it does not restrict the ability to dollarize or de-dollarize. Any country can dollarize unilaterally, without the permission of the United States, although that may reduce the chance that the United States will share seigniorage with it. Similarly, any country can de-dollarize unilaterally, although if the United States had been sharing seigniorage with it, the rebates of seigniorage would cease. In economic jargon, the Act is a Pareto improvement because it expands the range of available choices without imposing any new costs.

 

            Even strong supporters of dollarization do not wish the United States to pressure any country to dollarize. We have outlined some advantages of dollarization; it is for each country to decide whether particular disadvantages exist that outweigh the advantages. The International Monetary Stability Act greatly reduces one of the disadvantages by sharing seigniorage with officially dollarized countries that meet certain qualifications. However, it does not take a position on whether any country should dollarize.

 

            Just as the Act does not reduce the national sovereignty of any country considering dollarization, it does not reduce the national sovereignty of the United States. The Act does not establish a supranational central bank like the European Central Bank, nor does it give dollarized countries seats on the Board of Governors of the Federal Reserve System.

 

            Nonetheless, a potential disadvantage of dollarization for the United States is that dollarized countries exert pressure on the Federal Reserve System to be a lender of last resort to them. The International Monetary Stability Act contains safeguards to prevent that. Section 2 of the Act states that the Federal Reserve is not obligated to serve as a lender of last resort to officially dollarized countries. Section 3 requires the Secretary of the Treasury to consider whether a country has opened its banking system to foreign competition or met international banking standards before deciding to grant certification. Either step would greatly diminish the risk of a bank crisis. The presence of international banks has made Panama’s banking system very stable. If the U.S. government is concerned about the stability of banks in a country considering official dollarization, the Secretary of the Treasury can refuse to certify the country as eligible for a rebate of seigniorage from the dollar.

 

            Dollarization need not change the goals of U.S. monetary policy. The Act clearly states that the Federal Reserve is not obligated to consider their economic or financial conditions in setting monetary policy. This condition is not as harsh as it first seems. The Federal Reserve is already following something close to an internationally oriented monetary policy rather than a narrowly nationally oriented monetary policy. Just as the European Central Bank does not fine-tune monetary policy to help particular member countries, the Federal Reserve does not fine-tune to help particular states, some of which have larger economies than most independent countries. Rather, the Federal Reserve aims for low inflation to enable the economy of the United States as a whole to perform efficiently. Low inflation would also promote efficient performance in economies of officially dollarized countries. At a hearing on dollarization on April 22, 1999, Chairman Alan Greenspan remarked that even when monetary policy in the United States is at its tightest, interest rates are lower than the rates prevailing in many other countries when their monetary policy is at its loosest. Greenspan has also said that the Federal Reserve already receives pressure from foreign countries that are not dollarized, but the pressure does not influence it to take action that might be detrimental to the United States (U.S. Senate 1999a: 14-15).

 

            The Act also states that under dollarization, responsibility for supervising banks remains with dollarized countries. It would be impractical for U.S. regulators to supervise banks in other countries. Banking supervision has an element of politics: its effectiveness depends on the ability of the monetary authority, the executive branch, and the courts to enforce compliance. U.S. regulators have a political base at home that they would lack abroad -- indeed, they might be considered interlopers who had no business meddling with local banks. Enforcing compliance could be very hard. It is more practical for each country to remain responsible for supervising its own banks.

 

            Another potential disadvantage of dollarization for the United States is that sharing seigniorage with officially dollarized countries may seem to cost revenue. However, the International Monetary Stability Act does not rebate seigniorage for dollars already circulating abroad as part of unofficial dollarization. It only rebates seigniorage for increases in circulation of dollars that occur as a result of official dollarization. Until quite recently, no independent country that already has its own currency had even considered dollarization. Panama had no domestic currency when it dollarized in 1904, because it had only become independent of Colombia the year before. The other officially dollarized countries that are independent -- the Marshall Islands, Micronesia, and Palau -- were previously U.S. trust territories and were already using the dollar. East Timor, which became officially dollarized on January 24, 2000, is a newly independent country with no national currency; its government envisions establishing a national currency and de-dollarizing in a few years. In Ecuador, government officials have indicated that the prospect of a rebate of seigniorage under the International Monetary Stability Act favorably influenced their view of official dollarization.

 

 

Certification and decertification (sections 3 and 6)

 

            To qualify for a rebate of seigniorage, a country must be certified as officially dollarized by the Secretary of the Treasury. Section 3 of the International Monetary Stability Act enumerates considerations that should apply in determining whether a country qualifies for certification. These considerations can be summarized as saying that the dollar has substantially or totally replaced local currency; the banking system is open to foreign competition or meets international standards of solvency; and the country has engaged in consultations with the United States.

 

            The Act does not require the United States to give a rebate of seigniorage to any country. The Secretary of the Treasury has complete discretion whether to grant a rebate. A country need not fulfill all of the considerations listed in the Act for the Secretary to grant it a rebate of seigniorage. On the other hand, even if a country does fulfill all of the considerations, the Secretary can still deny it a rebate. The latitude that the Secretary has is one factor that should induce countries interested in official dollarization to cooperate fully with the United States.

 

            Certification is not an endorsement by the United States of the policies of a dollarized country. The Act does not intend to make the Treasury into a mini-IMF that imposes elaborate lists of alleged preconditions necessary for dollarization. Certification simply represents a judgment by the Secretary of the Treasury that a country is in fact officially dollarized and that sharing seigniorage with it is in the interest of the United States.

 

            The Act implicitly allows for the dollarizing to continue issuing coins, as Panama and Ecuador do. That is why the first in the list of considerations, whether a country has ceased issuing a local paper currency, does not mention ceasing to issue coins. The Act also does not require a country to make the dollar the exclusive legal tender. Other foreign currencies can be granted status as legal tender also, leaving the residents of a dollarized country to decide which currency best suits them.

 

            One of the considerations in the list is that a country should have opened its banking system to foreign competition or meet international banking standards, such as the Basle principles issued by the Bank for International Settlements. A sound banking system is important because a dollarized system has no central bank to print money to rescue commercial banks. The United States does not want to be blamed for the collapse of rotten banks in a dollarized system. In our view, opening the banking system to foreign participation is the most effective way to produce a sound system in the long run. For countries that do not wish to open their banking systems, though, an alternative is to strengthen them from within by promoting adherence to international standards. The Act does not require a country to open its banking system as a condition for certification, and the Secretary of the Treasury has the discretion to certify even a country with a closed banking system that does not meet international standards.

 

            To provide accountability for the Secretary, however, the Act requires him to issue a written statement explaining why he is certifying a country as dollarized. This is intended to make him explain his actions in cases where others might consider a country to be a questionable candidate for certification.

 

            U.S. territories such as Guam are not eligible for rebates of seigniorage because they already benefit indirectly from the seigniorage generated from the dollar. Territories are already part of the Federal system of spending and, to a lesser extent, taxation, so through Federal spending they already get back seigniorage their citizens generate.

 

            The length of certification is indefinite; there is no annual or other periodic review. Section 6 of the Act describes the conditions under which a country can be decertified. War against the United States automatically causes decertification. There is no reason for the United States to pay an enemy. A country can also be decertified if the Secretary of the Treasury determines that it is no longer dollarized in accordance with the Act. The main reason this would happen is that another currency displaces the dollar as the predominant paper money. A country might decide to issue a national currency again, or its residents might prefer to use the euro or another currency rather than the dollar. One can imagine Ukraine, for instance, becoming officially dollarized and then moving into the orbit of the euro as it becomes more closely integrated with Western Europe. If the dollar loses its predominance as the paper money of a country, the country is no longer generating the level of seigniorage presumed by certification, so to continue giving it a rebate would in effect cost money to the U.S. government. As with certification, the Act requires the Secretary of the Treasury to issue a written statement explaining the reasons for decertification so as to provide accountability.

 

 

Possibilities for sharing seigniorage

 

            In the abstract, several ways of determining and rebating seigniorage are possible. In practice, considerations of budgetary accounting and simplicity limit the options.

 

            Robert Barro (1999) has proposed the administratively simplest way of determining and rebating seigniorage: a one-time payment of dollars. In Barro’s example, if Argentina had $16 billion of pesos in circulation, it would give them to the United States and receive in return $16 billion of greenbacks. The United States would make no further exchanges of dollars for pesos. Barro’s reasoning is that if the $16 billion of greenbacks stay in circulation in Argentina, as they should, all it has cost the United States to put them into circulation is the expense of paper and ink; the United States has sacrificed no real resources. At an appropriate rate of discount, the present value of the seigniorage that Argentina would lose from dollarization is $16 billion, so the one-time payment would compensate Argentina fully.⁵ (To earn a profit on the transaction, the United States could give Argentina less than $16 billion, but the important feature of the proposal -- the one-time payment -- would be the same.)

 

            Barro’s idea is unfortunately not as simple politically and budgetarily as it is administratively. It provides no real safeguard against the possibility that a dollarizing country will quickly reintroduce a national currency and try to pocket the dollars it has received from the United States. (This is difficult but not impossible to accomplish if the dollars have been dispersed to the public.) The United States will have a stack of pesos that it could spend, but a dishonest country could demonetize the pesos and use only pesos of a new design. In terms of Federal budgetary accounting, Barro’s proposal might be designated as paying seigniorage before it accrues, creating an accounting loss even though no real economic loss occurs.

 

            Other ways of rebating seigniorage all rely on periodic payments rather than a one-time payment. A way of determining seigniorage under periodic payments is to issue notes of different design for each officially dollarized country. The Bureau of Engraving and Printing would print special designs for Panama, Ecuador, and other countries distinct from each other and from U.S. designs, though all would circulate at the same value. The United States would pay seigniorage proportional to the amount of each design of note in circulation. The design feature could be as minor as the different letter code printed for each Federal Reserve district on U.S. currency notes. However, the smaller the differences in design, the more dollars are likely to circulate across national boundaries (as dollar bills circulate across Federal Reserve districts), and the less accurate the determination of seigniorage would therefore be.

 

            The European Central Bank pays seigniorage in proportion to the share of each member country in the capital of the bank, but with the International Monetary Stability Act there is no thought of making dollarized countries shareholders in the Federal Reserve System.

 

            Still another way of determining seigniorage is to establish a formula that takes into account factors that seem relevant to the use of currency, such as GDP per person and population. Namibia and Lesotho both formerly used the South African rand exclusively, and now allow it to circulate in parallel to their own currencies, which are pegged to the rand at 1-to-1. South Africa pays them seigniorage based on a formula recognizing that since they are less developed, demand for currency is probably increasing faster than it is in South Africa and the share of seigniorage they generate is increasing (South Africa 1974, 1993). The disadvantage of applying such formulas to the dollar is that countries potentially interested in dollarizing vary so much in their level of economic development that the specific formula that South Africa uses would probably be inapplicable. Moreover, GDP, population, and other such statistics are often difficult to verify and so can be subject to manipulation. The International Monetary Stability Act bases rebates on U.S. Treasury securities given to the Federal Reserve as a counterpart for national currency retired from circulation; these quantities are readily verifiable.

           

 

The Act’s approach to sharing seigniorage (section 4)

 

            Under the International Monetary Stability Act, rebates of seigniorage would be made according to formulas set in the Act rather than through annual appropriations by the U.S. Congress.

 

            One way to think about why it is appropriate for the United States to offer rebates is to imagine what a country might do if it were not officially dollarized. It might establish a currency board to maintain an absolutely fixed exchange rate with the U.S. dollar. The currency board would hold $1 in U.S. Treasury securities or other foreign reserves for the equivalent of every $1 in local currency in circulation. The interest the currency board would earn from its holdings of Treasury securities would be its gross seigniorage. What was left after covering its expenses would be its net seigniorage. By dollarizing, a country gives up the opportunity to earn the interest it would receive under a currency board.⁶ The Act rebates most of that.

 

            A dollarizing country must give acceptable assets such as U.S. Treasury securities to the Federal Reserve System. In exchange for the assets, the dollarizing country will receive dollar notes (which pay no interest) and a rebate of seigniorage in lieu of the interest it formerly earned on the assets.

 

            The Act limits the base amount for calculating rebates of seigniorage to the dollar equivalent of local currency (notes and coins) in circulation before certification or the amount of dollar notes a country received for purposes of dollarizing, whichever is less. The Act links the maximum to currency in circulation rather than the monetary base, which is a broader measure comprising currency in circulation plus bank reserves. The reason is that demand for currency in circulation is largely market-determined, whereas demand for bank reserves can be driven mainly by required reserves that constitute a kind of tax on banks. In some countries that have high reserve requirements, the monetary base considerably exceeds currency in circulation. Rebating seigniorage on the monetary base rather than just on currency in circulation would in effect reward countries for imposing high reserve requirements. If a country tries to artificially increase currency in circulation just before certification so as to increase the value of its rebate, the Secretary of the Treasury can limit the amount of dollar notes given for purposes of dollarization or even refuse certification.

 

            Here is an example of how the base amount for calculating rebates would be determined. If a country has 100 billion peso notes and coins in circulation, and the exchange rate is 10 pesos per dollar, the maximum possible base will be $10 billion. The actual base amount is determined by the amount of assets acceptable to the U.S. government that the dollarizing country exchanges for dollar notes (and coins, if applicable). For example, if the country decides to keep issuing its own coins and has the equivalent of $1 billion of coins in circulation, it will only exchange $9 billion of Treasury securities and the base amount for calculating rebates will be $9 billion. And if the country only has $6 billion in acceptable assets to exchange for dollars, the base amount will be only $6 billion.

 

            After becoming certified a country must endure a ten-year waiting period before receiving its first rebate, which is a lump-sum accumulation of quarterly payments over the period. If the country is decertified before the period is over it receives no rebates. A purpose of the ten-year period is to ensure that countries interested in certification are serious about dollarization and understand the importance of persisting with it if they are to reap its benefits.

 

            The quarterly payments are calculated according to a slightly complicated-looking formula.⁷ The initial payment will be 85 percent times one-fourth (since this is a quarterly payment) of the average annualized yield to maturity on 90-day Treasury bills in the most recent three full months before payment.⁸ So, if base amount is $10 billion, the average yield to maturity of 90-day Treasury bills is 6 percent, and inflation in the United States has been zero since a country became certified, the seigniorage is $600 million a year or $150 million a quarter. Of this amount, the dollarizing country receives 85 percent ($510 million a year) and the United States keeps 15 percent ($90 million a year).

 

            The first payment is a lump-sum accumulation with interest.⁹  Later payments are quarterly. Rebates vary according to changes in interest rates and changes in U.S. inflation. If currency in circulation remains unchanged and the average interest rate falls by one-third, from 6 percent to 4 percent, the rebate also falls by one-third. If inflation increases the consumer price index by 2 percent and interest rates remain unchanged, the rebate increases 2 percent. Because it is difficult to trace dollars in circulation, it is impossible to determine precisely how many dollars are in circulation in each country. The Act therefore adopts an approach to calculating rebates that is rough and ready, but it is uniform and appeals to considerations of fairness. Stating the formula in the Act rather than leaving it to the discretion of the Secretary of the Treasury makes clear to countries interested in dollarization what the basis of payments will be if they receive certification. Countries that think the formula would be highly disadvantageous for them are free to refrain from dollarizing.

 

            Under the International Monetary Stability Act, the rebates of seigniorage dollarized countries receive will fluctuate along with the seigniorage the United States receives. The United States keeps 15 percent to pay the costs of operating the Federal Reserve System, offer rebates to previously dollarized countries, and leave a profit for itself. The main sources of revenue for the Federal Reserve System are seigniorage and fees that it charges banks. The fees it charges banks are for activities that in other countries are often handled by the private sector, such as processing checks. Only the remainder of the expenses of the Federal Reserve is true expenses of monetary policy. They typically amount to somewhat less than 5 percent of seigniorage revenue. So, ignoring the small cost of rebating seigniorage to previously dollarized countries, the Act leaves the United States with a pure profit of about 10 percent of the seigniorage generated.

 

 

Previously dollarized countries (section 5)

 

            Seven countries were already dollarized, in the narrow sense of using the U.S. dollar, before the current version of the International Monetary Stability Act was introduced: Panama; Ecuador (which had begun but not completed dollarization); three former U.S. trust territories that are now independent (the Marshall Islands, Micronesia, and Palau); and two British colonies (the Turks and Caicos Islands and the British Virgin Islands). Pitcairn Island was also previously dollarized, but because of its extremely small population (about 40 people) the Act omits it. East Timor and Ecuador were not dollarized when the original version of the Act was introduced, but the current version of the Act includes it in the list of previously dollarized countries in section 5.

 

            Other than Ecuador, none of the previously dollarized countries have recently had a separate national currency in circulation to form the basis for a calculation of seigniorage such as can be made for the great majority of countries. Estimates of the amount of dollars in circulation there are more or less guesses. The International Monetary Stability Act provides a solution by allowing them to receive payments equal to 4 percent of their nominal gross domestic product as of 1997. (When the original version of the Act was introduced, 1997 was the latest year for which internationally accepted statistics for GDP existed.) The figure of 4 percent corresponds to international averages of circulation as a percentage of GDP. More complicated formulas would have been possible, but in every formula there is some element of arbitrariness, so a simple and uniform formula seems least open to dispute.

 

            Previously dollarized countries are not eligible to be certified or to receive payments until the value of the payments that would be made to them is less than 10 percent of the value of payments issued to other dollarized countries. This clause exists to ensure that the profit from other dollarized countries is sufficient to pay for rebates of seigniorage to previously dollarized countries, so that the whole operation is self-financing and does not impose a loss on the U.S. government. The figure of 10 percent is roughly the net seigniorage (pure profit) the United States gains from seigniorage, since the expenses of the Federal Reserve are expected to be no more than 5 percent of the gross seigniorage. After previously dollarized countries receive their initial payment, their payments will change from year to year just as payments to other dollarized countries do.

 

            The Act could have simply omitted paying seigniorage to already dollarized countries. However, they could then become certified by introducing a temporary national currency expressly for the purpose of circumventing the Act and gaining certification. Paying seigniorage to already dollarized countries avoids such shenanigans and recognizes that it is fair to put already dollarized countries on a similar basis to countries that dollarize after the Act was introduced.

 

 

Other provisions (sections 7 and 8)

 

            Section 7 is a blanket provision providing that the Secretary of the Treasury and the Board of Governors of the Federal Reserve System may issue appropriate regulations to carry out the Act. For example, the Treasury Department may develop more detailed procedures for certification than are mentioned in the Act, so as to make the steps involved in gaining certification quite transparent.

 

            Section 8 authorizes appropriation to the Secretary of the Treasury of such amounts as are necessary to cover expenses and payment under the Act. It is a typical blanket provision that removes the necessity for the Congress to make an annual appropriation for whatever additional staff, printing costs, and so on the Act may require.

 

 

Cost of the Act

 

            As required by law, the U.S. Congressional Budget Office (CBO) estimates the budgetary implications of proposed legislation. Because the International Monetary Stability Act is the first proposal of its type in U.S. legislation, the CBO had no established method for making an estimate. It devised a probabilistic method, assuming that passage of the Act would increase by 50 percent the probability that certain countries would become dollarized. The CBO’s baseline scenario, therefore, assumes some probability that those countries would dollarize without the Act. Dollarization without a rebate of seigniorage would generate more revenue for the United States than dollarization with a rebate.

 

            The CBO estimated that if the Act entered into force this year, relative to the baseline scenario (not in an absolute sense) it would “cost” $4 million in revenue in fiscal 2001, gain less than $500,000 in 2002, and gain increasing amounts thereafter, amounting to an overall gain of about $1 billion over the ten years 2001-10 (U.S. Senate 2000b: 13-15). Our own view is that the CBO’s calculations are conservative. Passage of the Act could dramatically shift the politics of dollarization, resulting in many more Latin American countries becoming dollarized within a few years to take advantage of the regional economies of scale in finance and trade that a common currency would offer.

 

 

 

Some criticisms of the Act

 

            The U.S. Treasury Department expressed its views about the International Monetary Stability Act in a short letter to Senator Mack just hours before the Senate Banking Committee voted on the Act (reproduced in U.S. Senate 2000b: 19). The letter says, “We do not believe, however, that there is a compelling reason for the United States at this time to establish a framework to permit us to share seigniorage. Such a framework would raise a number of complex political, economic, foreign policy issues, and U.S. budget issues....”

 

            To us, the Treasury’s response is weak. The U.S. government’s behavior in international monetary affairs already involves it in complex political, economic, and foreign policy issues. Over the past several years, the U.S. government has helped bail out a number of countries hit by currency crises that would not have occurred under dollarization. The crises have given the Treasury and international financial institutions extraordinary leverage to influence government budgets and economic policy in the affected countries. The result is such absurdities as the IMF and the U.S. Treasury telling the telling the South Korean government in December 1997 to eliminate adjustment tariffs on 24 items, or telling the Indonesian government in early 1998 that it must abolish the monopoly of clove marketing. Whatever one thinks of tariffs or the clove monopoly, surely they have no significant effect on the domestic or international monetary system. Rather than raising complex issues, the International Monetary Stability Act would simplify international politics and economics by offering countries a way to end currency crises once and for all, thus avoiding the intrusions by the Treasury and international financial institutions that South Korea, Indonesia, and other countries have suffered during bailouts.

 

            Other criticisms of the Act come from observers who think a multinational central bank patterned on the European Central Bank would be preferable to dollarization (von Furstenburg 2000). We reply by noting how different the position of the United States in the western hemisphere is from the position of Germany, the key economy of the eurozone. The United States has roughly three-quarters of the total GDP of the hemisphere, versus Germany’s one-third share in the eurozone. The difference in long-term monetary performance even between Germany and Italy or Spain pales in comparison to the difference between the United States and Mexico, Brazil, or most other countries in the Western Hemisphere. Hence the United States has far more to lose in terms of influence and possible higher inflation from a multinational central bank than Germany does. We do not think the International Monetary Stability Act forecloses the possibility of a multinational central bank if some day there is sufficient support for the idea in the United States. But to us that day seems at least a few years away. Certainly in the current climate of opinion we cannot imagine a proposal to establish a multinational central bank proceeding as far through the legislative mill as the International Monetary Stability Act has.

 

            Moreover, consider that the European Central Bank took many years to establish. Member countries were required to fulfill a rather long list of convergence criteria that included inflation and public debt. Many countries in fact did not meet all the criteria and were admitted for membership only because of mutual agreement to fudge the figures. The International Monetary Stability Act allows a much quicker, more streamlined approach because, as the case of Ecuador exemplifies, dollarization has no “preconditions” such as low inflation, low public debt, a sound banking system, etc. Rather, dollarization promotes the economic stability that allows those desirable things to occur. Western Europe was already rich and enjoyed relatively high monetary stability while its leaders wrangled for years about the terms of monetary union. Most developing countries do not enjoy high monetary stability and cannot afford to wait for years to adopt monetary arrangements that will help them catch up to developed countries. They can establish dollarization immediately, if they wish.

 

 

Conclusion

 

            To our knowledge, the International Monetary Stability Act is unique, in that it is the first legislation anywhere that creates a standing offer potentially open to all countries interested in joining a common currency zone. Membership in other currency zones has been heavily determined by historical factors (such as a history as a British colony, for membership in the now-defunct “sterling area”) or subject to lengthy multilateral negotiations (as for the countries that belong or aspire to belong to the European Central Bank). The vision of the International Monetary Stability Act is to promote a highly inclusive group rather than an exclusive club of member countries. Under the Act, countries will be free to join the group or to leave it as they see fit; the United States will not exert pressure on them in either direction.

 

            Initial discussion of the “international financial architecture” ignored dollarization as a possibility for making the architecture more solid. It now seems that dollarization will have an important role in the coming years. The International Monetary Stability Act has already had some role in encouraging dollarization, and will have much more if it becomes law.

 

 

Addendum: The Fate of the International Monetary Stability Act

 

            The 106^th U.S. Congress is now nearing the end of its existence. As of October 10, 2000, when this addendum is being written, it seems unlikely that the International Monetary Stability Act will make further legislative progress. The U.S. government’s fiscal year began on October 1, but Congress has not yet passed some of the appropriations bills to fund spending in the new year. The appropriations bills are its top priority, and few or no other bills will pass before Congress adjourns. Rules of parliamentary procedure require that the International Monetary Stability Act would have to be reintroduced as a new bill in the 107^th Congress, which begins its two-year term in January 2001.  Senator Connie Mack is retiring at the end of the 106^th Congress. However, Representative Paul Ryan, the sponsor of the Act in the House of Representatives, is running for re-election and has expressed interest in continuing to advance the ideas expressed in the Act.
References

 

            The International Monetary Stability Act (S.2101 and H.R.4818), reproduced in the appendix, is also available online at <http://thomas.loc.gov>. For material on dollarization from the Joint Economic Committee, see <http://www.senate.gov/~jec/dollarnews.htm>. For other information on dollarization, see Kurt Schuler’s Web site, <http://www.dollarization.org>.

 

Baliño, Tomás J., Adam Bennett, and Eduardo Borensztein. 1999. Monetary Policy in Dollarized Economies. Occasional Paper 171. Washington: International Monetary Fund.

Barro, Robert. 1999. “Let the Dollar Reign from Seattle to Santiago.” Wall Street Journal, March 8, p. A18.

IMF. 1999. International Monetary Fund. Annual Report on Exchange Rate Arrangements and Exchange Restrictions. Washington: International Monetary Fund.

Rose, Andrew, and Charles Engel. 2000. “Currency Unions and International Integration.” National Bureau of Economic Research working paper W7872, September.

Schuler, Kurt. 1996. Should Developing Countries Have Central Banks? Currency Quality and Monetary Systems in 155 Countries. London: Institute of Economic Affairs.

Schuler, Kurt. 1999. “Encouraging Official Dollarization in Emerging Markets.” Staff report, Office of the Chairman, Joint Economic Committee, U.S. Congress, April. <http://www.senate.gov/~jec/dollarization.htm>

Schuler, Kurt. 2000. “Basics of Dollarization.” Staff report, Office of the Chairman, Joint Economic Committee, U.S. Congress, January. <http://www.senate.gov/~jec/basics.htm>

Schmitt-Grohé, Stephanie, and Martín Uribé. 1999. “Dollarization and Seigniorage: How Much Is at Stake?” Working paper, Rutgers University and University of Pennsylvania, July 9. <http://www.econ.upenn.edu/~uribe/seignorage.pdf>

South Africa. 1974. “Multilateral Monetary Agreement Between the Government of the Kingdom of Lesotho, the Government of the Republic of Namibia, the Government of the Republic of South Africa, and the Government of the Kingdom of Swaziland.” Mimeo.

South Africa. 1993. “Bilateral Monetary Agreement Between the Government of the Republic of Namibia and the Government of the Republic of South Africa.” Mimeo.

Stein, Robert. 1999a. “Issues Regarding Dollarization.” Staff report, Subcommittee on Economic Policy, U.S. Senate Committee on Banking, Housing and Urban Affairs, July. <http://www.senate.gov/~jec/bankingdollar.htm>

Stein, Robert. 1999b. “Citizen’s Guide to Dollarization.” Staff report, Subcommittee on Economic Policy, U.S. Senate Committee on Banking, Housing and Urban Affairs, September. <http://banking.senate.gov/docs/reports/dollar.htm>

Stein, Robert. 2000. “Dollarization: A Guide to the International Monetary Stability Act.” Staff report, Office of the Chairman, Joint Economic Committee, U.S. Congress, February. <http://www.senate.gov/~jec/dollaract.htm>

UNTAET. 2000. United Nations Temporary Administration in East Timor. Regulation no. 2000/7. On the Establishment of a Legal Tender for East Timor. <http://www.un.org/peace/etimor/reg700.html>

U.S. Senate. 1999a. Committee on Banking, Housing and Urban Affairs, Subcommittee on Economic Policy and Subcommittee on International Trade and Finance. “Hearing on Official Dollarization in Emerging-Market Countries,” 22 April. Senate Hearing 106-210. Washington: Government Printing Office. <http://www.gpo.gov>

U.S. Senate. 1999b. Committee on Banking, Housing and Urban Affairs, Subcommittee on Economic Policy and Subcommittee on International Trade and Finance. “Hearing on Official Dollarization in Latin America,” 15 July. Senate Hearing 106-398. Washington: Government Printing Office. <http://www.gpo.gov>

U.S. Senate. 2000a. Committee on Banking, Housing and Urban Affairs, Subcommittee on Economic Policy. “Hearing on S. 1879--‘The International Monetary Stability Act.’” <http://www.senate.gov/~banking/00_02hrg/020800/index.htm>

U.S. Senate. 2000b. Committee on Banking, Housing and Urban Affairs. “Report of the Committee on Banking, Housing, and Urban Affairs, United States Senate, to Accompany S. 2101, Together with Additional Views.” Senate Report 106-354. <http://www.gpo.gov>.

von Furstenburg, George. 2000. “A Case Against U.S. Dollarization.” Challenge, v. 43, no. 4, July-August: 108-20.

APPENDIX: THE INTERNATIONAL MONETARY STABILITY ACT

 

[This is the version of the Act passed by the Senate Banking Committee and reported to the full Senate on July 13, 2000.]

 

SECTION 1. SHORT TITLE.

 

 This Act may be cited as the `International Monetary Stability Act of 2000'.

 

SEC. 2. FINDINGS; STATEMENT OF POLICY.

 

 (a) FINDINGS- Congress finds that--

 

 (1) monetary stability is a prerequisite for strong long-term economic growth and increasing standards of living;

 

 (2) many emerging market countries lack monetary stability and have therefore suffered economic and  financial problems that suppress economic growth and living standards, including financial fragility,  inflation expectations that are built into labor markets, and high and volatile inflation rates and interest  rates;

 

 (3) many emerging market countries have used pegged exchange rate systems to try to foster monetary  stability and have experienced temporary periods of higher economic growth and lower inflation followed by drastic balance of payments problems, steep devaluations, and major losses in international reserves;

 

 (4) emerging market countries that have adopted currency board systems have enjoyed higher rates of economic growth and lower interest rates, although interest rates have remained higher for loans denominated in the domestic currency than in the anchor currency;

 

 (5) since the financial and economic crisis that struck Asia in 1997, there has been growing international interest in official dollarization, whereby a country would substantially or totally eliminate its domestic currency and adopt the United States dollar as legal tender;

 

 (6) official dollarization would let a country import monetary stability, thereby bringing inflation and interest rates down toward the levels of the United States;

 

 (7) official dollarization would make it impossible for governments to print domestic currency to pay for government programs, thereby promoting fiscal discipline;

 

 (8) official dollarization would make it easier for people to conduct financial transactions in the currency they use for daily commerce, thereby promoting deeper financial markets;

 

 (9) lower inflation, interest rates, and inflation and interest-rate volatility, greater fiscal discipline, and deeper financial markets would increase long-term economic growth and raise living standards in emerging market countries;

 

 (10) by increasing trade and investment flows and decreasing the need for foreign assistance, greater economic growth and higher living standards abroad would serve the interests of the United States;

 

 (11) countries that become officially dollarized would lose seigniorage (the profit from issuing a currency) and this is a significant barrier to official dollarization;

 

 (12) official dollarization would increase the seigniorage earnings of the United States;

 

 (13) it would be mutually beneficial for the United States to encourage official dollarization by offering to share with countries that become officially dollarized a portion of the extra seigniorage earnings that the United States would earn; and

 

 (14) encouraging official dollarization complements ongoing efforts by the United States to strengthen the international financial architecture.

 

 (b) STATEMENT OF POLICY- It is the policy of the United States that--

 

 (1) the Federal Reserve System has no obligation to act as a lender of last resort to the financial systems of dollarized countries;

 

 (2) the Federal Reserve System has no obligation to consider the economic conditions of dollarized countries when formulating or implementing monetary policy;

 

 (3) the supervision of financial institutions in dollarized countries remains the responsibility of those countries; and

 

 (4) in the absence of certification by the Secretary of the Treasury under section 3, countries are free to dollarize unilaterally.

 

SEC. 3. CERTIFICATION.

 

 (a) IN GENERAL- The Secretary of the Treasury (referred to in this Act as the `Secretary') may certify a foreign country as officially dollarized, after consideration of whether the country has--

 

 (1) ceased issuing a domestic paper currency;

 

 (2) destroyed the materials (such as plates and dies) used to produce such currency;

 

 (3) extinguished a substantial portion of the domestic currency in circulation, with plans to extinguish as much of that currency as feasible;

 

 (4) ended the legal tender status of the domestic currency;

 

 (5) granted legal tender status to the United States dollar;

 

 (6) ceased accepting domestic currency, except in exchange for United States dollars;

 

 (7) ceased making government payments in the domestic currency;

 

 (8) substantially redenominated its prices, assets, and liabilities in United States dollars;

 

 (9) either opened its banking system to foreign competition or met international banking standards (such as those described in the Core Principles for Effective Banking Supervision issued by the Basle Committee on Banking Supervision of the Bank for International Settlements);

 

 (10) engaged in advance consultations with the Secretary to determine whether the country is a good candidate for official dollarization; and

 

 (11) cooperated with the United States regarding the prevention of money laundering and counterfeiting.

 

 (b) OTHER CONSIDERATIONS- In deciding whether to certify a country as officially dollarized under this section, the Secretary may consider any additional factors that the Secretary deems relevant.

 

 (c) DECISION BY SECRETARY- The absence of any 1 or more of the considerations described in subsection (a) or (b) does not preclude the Secretary from certifying a country as officially dollarized.

 

 (d) STATEMENT BY SECRETARY- The Secretary shall issue a written statement upon certification of a country under this section that explains why that country has been certified. The Secretary may not certify United States territories or commonwealths as officially dollarized.

 

SEC. 4. PAYMENTS.

 

 (a) IN GENERAL-

 

 (1) ELIGIBILITY- A country shall not be eligible for payments under this section until the first business day of the 121st full calendar month following the date of certification of the country under section 3.

 

 (2) QUARTERLY PAYMENTS- Starting with the first business day of the 124th full calendar month following the date of certification of a country under section 3, the Secretary shall, every 3 calendar months, pay a country certified under section 3 an amount equal to the following:

 (C)(i1)(25%)(P2/P1)(85%).

 

 (3) LUMP SUM PAYMENT- On the first business day of the 121st full calendar month following the date of certification of a country under section 3, the Secretary shall pay a country that has been continuously certified for 120 months under section 3 an amount equal to the following:

 (C)(i2)(850%)(P3/P1)(1+i3)4.875.

 

 (b) DEFINITIONS- In this Act:

 

 (1) `C' = the lesser of--

 

 (A) the dollar amount of Federal Reserve Notes that the country receiving the payment acquired  from the Federal Reserve System for purposes of official dollarization under this Act; or

 

 (B) the dollar value of the domestic currency in circulation in the country receiving the payment  prior to the certification of that country under section 3.

 

 (2) `i1' = average yield to maturity on 90-day Treasury bills in the most recent full 3-month calendar period occurring before the date of payment under subsection (a)(2), except that if 90-day Treasury bills are discontinued, the Secretary may substitute an appropriate alternative interest rate.

 

 (3) `i2' = average yield to maturity on 90-day Treasury bills in the most recent full 120-month calendar period occurring before the date of payment under subsection (a)(3), except that if 90-day Treasury bills are discontinued, the Secretary may substitute an appropriate alternative interest rate.

 

 (4) `i3' = average yield to maturity on 10-year Treasury bonds in the 120-month calendar period occurring before the date of payment under subsection (a)(3), except that if 10-year Treasury bonds are discontinued, the Secretary may substitute an appropriate alternative interest rate.

 

 (5) `P1' = the nonseasonally adjusted United States City Average All Items Consumer Price Index for All Urban Consumers (referred to as `CPI-U') for the month occurring before the date of certification under section 3, except that if this price measure is discontinued or, in the judgment of the Secretary, altered in a manner that is materially adverse to the interests of the United States, the Secretary may, after consultation with the Bureau of Labor Statistics, substitute an appropriate alternative index.

 

 (6) `P2' = the nonseasonally adjusted United States City Average All Items Consumer Price Index for All Urban Consumers (referred to as `CPI-U') for the most recent month occurring before the date of payment under subsection (a)(2) for which data are available, except that if this price measure is discontinued or, in the judgment of the Secretary, altered in a manner that is materially adverse to the interests of the United States, the Secretary may, after consultation with the Bureau of Labor Statistics, substitute an appropriate alternative index.

 

 (7) `P3' = the average nonseasonally adjusted United States City Average All Items Consumer Price Index for All Urban Consumers (referred to as `CPI-U') for the most recent full 120 calendar months occurring before the date of payment under subsection (a)(3) for which data are available, except that if this price measure is discontinued or, in the judgment of the Secretary, altered in a manner that is materially adverse to the interests of the United States, the Secretary may, after consultation with the Bureau of Labor Statistics, substitute an appropriate alternative index.

 

 (c) SOURCE OF FUNDS- The Secretary may make payments under this Act out of revenue from any funds paid to the Treasury by Federal Reserve Banks.

 

 (d) REDUCTIONS IN PAYMENTS- If, in the judgment of the Secretary, the amount of United States dollars in circulation in a certified country is such that payments under this Act would impose a net loss of revenue on the United States Government, the Secretary may reduce the payment, but only after the Secretary has issued a written public statement explaining the reasons for doing so.

 

SEC. 5. PREVIOUSLY DOLLARIZED COUNTRIES.

 

 (a) LIMITATION- The Republic of the Marshall Islands, the Federated States of Micronesia, the Republic of Palau, Panama, East Timor, the Turks and Caicos Islands, the Republic of Ecuador, and the British Virgin Islands may not be issued payments under this Act until 10 percent of the payments made to countries other than those listed in this subsection equals or exceeds the total payments that would be made to the countries listed in this subsection.

 

 (b) PAYMENT CALCULATION- Upon certification under section 3, each of the countries listed in subsection (a) shall receive payments in accordance with section 4, except that for purposes of the countries listed in subsection (a) of this section, `C' equals (4%)(Y), where `Y' equals nominal dollar gross domestic product for the country receiving the payment, as calculated by the World Bank (or other recognized statistical authority), as of September 30, 1999, for calendar year 1997.

 

SEC. 6. DECERTIFICATION AND PAYMENT CANCELLATION.

 

 (a) IN GENERAL- The Secretary shall decertify and cease making payments to a country under this Act if the United States declares war on the country, or if the Secretary determines that the country is no longer officially dollarized in accordance with this Act and issues a written public statement to that effect that lists the reasons for such determination.

 

 (b) CONSIDERATIONS- In making a determination under this section, the Secretary shall consider the factors listed in section 3(a) and any additional factors that the Secretary determines to be relevant.

 

 

SEC. 7. REGULATIONS.

 

 The Secretary and the Board of Governors of the Federal Reserve System may issue regulations appropriate to carry out this Act.

 

SEC. 8. EXPENSES.

 

 There are authorized to be appropriated to the Secretary such amounts as may be necessary for expenses and payments under this Act.

 

[END]