Answer to Question #59135 in Macroeconomics for Amit

Question

Suppose you are advising a small country like Bermuda on whether to print it's own money or to use money of its large neighbour such as U.S.A?
What are cost and benefits of national money ??
Does the relative political stability of 2 countries have any role in this decision ???

Answer 1

When a small country (Bermuda) adopts the money of its neighbor (USA) instead of printing its own money it bears the cost of losing monetary policy as an independent policy instrument. But this has the advantage of importing monetary discipline and, in particular, ruling out seigniorage and hyperinflation - provided of course that the American Central Bank is independent and committed to low and stable inflation.
The benefit from this practice is a decrease in the political stability (and central bank independence) of Bermuda relative to the USA*.

*- according to materials of London School of Economics (LSE) – T.Fetzer's teaching materials.