The Quarterly Review of Economics and Finance 45 (2005) 662–679 Dollarization in Latin America: seigniorage costs and policy implications Carsten Lange, Christine Sauer ∗ a Department of Economics, California State Polytechnic University, Pomona, USA b Department of Economics, MSC05 3060, 1 University of New Mexico, Albuquerque, NM 87131-0001, USA Received 1 May 2003; received in revised form 28 August 2003; accepted 29 January 2004 Available online 8 February 2005 Abstract This paper examines the seigniorage costs of official dollarization in 15 Latin American countries. We show that the total costs can be decomposed into two components: seigniorage transferred to the U.S. and seigniorage lost due to greater financial stability in the dollarized country. Results indicate that seigniorage costs and their components are significant, yet differ considerably across countries. A cluster analysis is performed to sort countries into homogenous sub-groups. At a stage with five sub-groups we find groups with increasing seigniorage burdens. At a stage with two sub-groups we can identify candidates for possible seigniorage revenue-sharing agreements with the U.S. © 2005 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: E42; F36; O54; C14 Keywords: Dollarization; Seigniorage; Latin America; Cluster analysis 1. Introduction The worldwide turmoil in financial markets during the 1990s, with its devastating effects on emerging market economies in Latin America and elsewhere, has intensified the debate in government, business, and academic circles about the appropriate policies and institutional ∗ Corresponding author. Tel.: +1 505 277 1963; fax: +1 505 277 9445. E-mail address: sauer@unm.edu (C. Sauer). 1062-9769/$ – see front matter © 2005 Board of Trustees of the University of Illinois. All rights reserved. doi:10.1016/j.qref.2004.01.002