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Dollarization in Israel-Palestine?

Executive Summary

For a small economy, heavily dependent in its trade
and capital account transactions on a particular
large economy, it may well make sense to adopt the
currency of that country
“—Professor Stanley Fisher,
deputy managing director of the IMF in 2001 and
governor of the Bank of Israel in 2005.

This paper is a proposal for a radical currency arrangement
by which the U.S. dollar will become the only
legal tender in Israel, completely replacing the Israeli
shekel, which is also the dominant currency of the
Palestinian Authority. The popular name for such an
arrangement is “full dollarization,” defined by the IMF
as the use by a country of “the currency of another
country, which circulates as the sole legal tender.”
Under the dollarization scheme, the United States will
become the anchor and Israel the client country. This
paper will present four perspectives on dollarization:
the Israeli, the American, the Palestinian, and the
economists’, concluding with four appendices.

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