This paper unfolds the puzzles of why dollarization helps reduce inflation in some countries but not in some others and why it might alleviate or aggravate exchange rate volatility. It also reveals how dollarization affects the monetary policy transmission mechanisms and why the exchange rate channel is most effective in a dollarized economy. This paper finds the balance sheet effect, the purchasing power effect, currency substitution effect, currency mismatch and “ fear of floating” as some of the answers to the why, how and what questions posed in the study.