Fiscal consequences for Mexico of adopting the dollar

Dollarization implies a reduction in the menu of assets available to the go vernment and to the private sector in managing risk. Whatever the gains fro m dollarization, the costs of reducing the asset menu need to be weighed ag ainst them. This paper presents models, one a simple generalization of a we ll-known model of tax smoothing by Barro, in which these costs are explicit . Along the way, it suggests that there is likely to be no reduction in int erest costs to the government from dollarization.