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Having one of the "big currencies" (US-Dollar, Euro, Japanese Yen) is of several advantages:

  • Tourism: There is a huge amount of people who can directly use it (317*10^6 US citizens, 337*10^6 people in the Eurozone, 128*10^6 Japanese).
  • Trade barriers: I guess trade might also get easier, at least for small companies.
  • Reliability: Citizens and companies can probably trust more in the value being stable of those 3 currencies than smaller ones.
  • Security: I'm not too sure about the Dollar / Yen, but Euro bank notes have quite a lot of security mechanisms which make the forgery of banknotes harder.

Especially for small countries, I would guess having one of those big currency would have the advantage of not having to pay for producing the bank notes / coins.

So why do contries like Seychelles (Seychellois rupee), São Tomé and Príncipe (São Tomé and Príncipe dobra), Cape Verde (Cape Verdean escudo) ... have their own currencies? Can you give one example which shows the effect if such a country took one of the big currencies?

Are countries not allowed to use another countries currency officially?

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  • $\begingroup$ @denesp How is that a duplicate? I didn't say anything about "after withdrawal from a currency union" which seems to be about the very specific case of Greece. But Greece / currency unions are a special case where other factors might be to consider. $\endgroup$
    – Martin Thoma
    Oct 21, 2015 at 12:15
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    $\begingroup$ Very well. I have retracted my vote. Please consider reading the other question because it clearly answers whether you can use another country's currency (it is not just the euro, the dollar is also discussed) and the answer lists some of the advantages and disadvantages. economics.stackexchange.com/questions/6350/… $\endgroup$
    – Giskard
    Oct 21, 2015 at 12:25
  • $\begingroup$ Kiribati uses the Australian dollar, Liechtenstein uses the Swiss Franc, et al. $\endgroup$
    – Mikey
    Mar 14, 2017 at 3:03

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Having your own currency means that you can conduct your own monetary policy. Adopting another country's currency means that you trade your ability to make decisions about your country's quantity of money, inflation target, etc. to a tested and solid mean of payment (the advantages you listed are good reasons).

You might consider European countries adopting the euro as an example of countries adopting a single currency. Ecuador adopting the U.S. dollar in 2000 might be a good place to look if you want to see the effect in a specific country.

There are quite a few countries in the world which use another country's currency as their official currency. This article lists them all (as of 2014): http://qz.com/260980/meet-the-countries-that-dont-use-their-own-currency/

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There needs to be a reason to choose to use foreign currency over your own, and as much I am aware of, most of the cases when countries adopt foreign currency is if they lose trust in their monetary authority. For example, Zimbabwe saw a large dollorization of their economy, once inflation was let loose.

Also, having your own currency gives you an additional tool - exchange rate (floating), which can help you absorb external and internal shocks. For example, if you begin running large trade deficits, currency depreciation can help in correcting the imbalances.

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