What downside is there to making the USD the national currency for your country?

Question

I get that for huge countries like China, you can't have the US controlling your currency.

But for some smaller countries, or new fledgling countries, why not have the USD be your national currency? It's historically the most stable currency with the least inflation, and much more reliable internationally than a small country's currency.

As a simple example: is there any reason that Jamaica would want it's own currency that they control (the Jamaican Dollar) instead of using a currency that's stable and internationally recognized like the USD?

If it's not clear, my understanding of economics isn't amazing, so an ELI5-ish answer would be appreciated. And I don't want silly logistical excuses (e.g. Jamaica wouldn't be able to exchange their notes for US notes in a reasonable manner). I want fundamental economic/political reasons why a small country with no strong international power/influence would choose to have its own inferior currency instead of just using a "gold standard" like the USD.

Answer 1

The most obvious reason is that any country that adopts the USD as its currency (called dollarization) loses control of its monetary and exchange rate policy. For example it is no longer possible to combat a recession by lowering interest rates; instead the country must accept the actions of the US Federal Reserve. Nor can it devalue its currency to improve its international competitiveness. This problem is exacerbated if the local economy is not well correlated to the US economy. Additionally, the central bank cannot print domestic currency in order to act as lender of last resort. Instead, it must maintain adequate US dollar reserve balances to draw on in times of crisis.

Answer 2

The previous answer is absolutely correct, but if I may put it in slightly more ELI5-ish terms, the main problem for countries trying to make the USD their national currency is ensuring that they actually have enough USD. Having enough USD is never a problem for the US because they can issue as many of them as they like. But if Jamaica decided it were to adopt the USD instead of the Jamaican Dollar, they would need to obtain enough USD to circulate in its economy. This isn't so straightforward – but at its simplest level, Jamaicans would need to produce enough stuff that people outside the country want to pay USD for, then enough of those USD need to stay in Jamaica and not spent or kept outside the country. If I live in a village somewhere where neither I nor anyone else in the village hold any USD, we're going to use something other than the USD to do business with each other.