When the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency then Dollarization takes place. The term is not only applied to usage of the United States dollar, but generally it is applied to the use of any foreign currency as the national currency.

Conditions for the Occurrence of Dollarization

Dollarization can occur

• Unofficially, when the foreign currency is given preference over domestic currency by the private agents. for instance deposits are held by them  in the foreign currency because of a bad track record of the local currency.

• Semiofficially (or officially bimonetary systems), in those countries where foreign currency is legal tender, but a secondary role to domestic currency is played by it.
• officially, when a country stops issuing the domestic currency and only foreign currency is used by the country. That country adopts the foreign currency as legal tender.

Until 1999, a very little had been received by the official dollarization as it was considered politically impossible, until December 2000 when it was implemented in Ecuador by then-president Jamil Mahuad. Since then, prominence has been gained by official dollarization as several countries have considered it and it is implemented by them as official policy. The major advantage that is provided by dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.

The biggest economies (other than the US) that have been officially dollarized as of June 2002 are Ecuador (since 2000), El Salvador (since 2001), and Panama (since 1904).

As of August 2005, the United States dollar, the euro, the New Zealand dollar, the Swiss franc and the Australian dollar had been the only currencies that were used by other countries for official dollarization. In addition, the Turkish lira, the New Israeli Shekel, and the Russian ruble are used by those states that are internationally unrecognized but de facto independent states.

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