This means giving up all the advantages of central banking and is generally only done informally by countries experiencing hyperinflation without capital controls. It's a marker of a failed state.
I remember in live TV debates for the 2014 Scottish independence referendum, the Yes leader insisted that Scotland could not be prevented from using the Pound sterling. It's technically true, but a very, very bad idea.
They don't give up the advantages of central banking at all.
What they give up is political control of their bank. There are advantages to having political control, but often political control is abused - which is why failed states have given up on it as part of their efforts to rebound. The US and EU both have controls in place to limit the power of politicians from making changes for political reasons.
> This means giving up all the advantages of central banking and is generally only done informally by countries experiencing hyperinflation without capital controls. It's a marker of a failed state.
The US did not have a central bank until 1914. And there was zero net inflation from 1800-1914. The central bank introduced endemic inflation, which appeared immediately.
By design. Having a slightly positive inflation rate gives you a cushion against deflation, which tends to cause market crashes. A currency I can be confident will lose a couple percent yearly is more useful than one that might be worth wildly different amounts year to year.
If you scroll down a bit on this page, you can see the massive inflation/deflation spikes in ~10yr cycles that existed prior to central banking.
Montenegro unilaterally uses the euro and it doesn't seem to otherwise be a failed state. Besides this being a "marker", what do you think are the actual problems caused? Like why does a small country need its own capital controls when there is a very stable currency available nearby?
The reason for your own currency is you can set your own interest rates to fit your local economy. If you are in a local recession while others are doing well you might want lower interest rates, while others need them higher. Both places are trying to make the same balance of inflation vs stimulating the economy - but they need different answers.
I'm not convinced it is worth it. Generally world economies are tightly tied anyway and so what is right for large currencies is close enough for everybody. The less coupled you are to the world the more important it is that you can be different.
Not significantly. Your point that only failed states decide to use another nation's currency is automatically a failed state is simply untrue. It can be a marker, but it's not an automatic mark. Montenegro is not a failed state.
It would, and this has been an issue even with bigger eurozone countries, like Greece.
Basically the same pressure that would have adjusted your exchange rates instead adjusts how much of the fixed-rate currency exists in your country. With fluctuating rates the pain of a financial outflow is more evenly spread than with a government running out of money, unless the government adjusts taxes to compensate.
I remember in live TV debates for the 2014 Scottish independence referendum, the Yes leader insisted that Scotland could not be prevented from using the Pound sterling. It's technically true, but a very, very bad idea.