Official Dollarization As a Monetary Regime: Its Effectson El Salvador

June 1, 2011

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Format: Chicago

Andrew J Swiston. Official Dollarization As a Monetary Regime: Its Effectson El Salvador, (USA: International Monetary Fund, 2011) accessed November 15, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines El Salvador’s transition to official dollarization by comparing aspects of this regime to the fixed exchange rate regime prevailing in the 1990s. Commercial bank interest rates are analyzed under an uncovered interest parity framework, and it is found that dollarization lowered rates by 4 to 5 percent by reducing currency risk. This has generated net annual savings averaging ½ percent of GDP for the private sector and ¼ percent of GDP for the public sector (net of the losses from foregone seigniorage). Estimated Taylor rules show a strong positive association between Salvadoran output and U.S. Federal Reserve policy since dollarization, implying that this policy has served to stabilize economic activity more than it did under the peg and more than policy rates in Central American countries with independent monetary policy have done. Dollarization does not appear to have affected the transmission mechanism, as pass-through of monetary policy to commercial interest rates has been similar to pass-through under the peg and in the rest of Central America.

Subject: Central bank policy rate, Commercial banks, Currencies, Dollarization, Financial institutions, Financial services, Inflation, Monetary policy, Money, Prices

Keywords: Central America, Central bank policy rate, Commercial bank interest rate, Commercial banks, Core inflation, Currencies, Currency risk, Dollar-denominated rate, Dollarization, Exchange rate regime, Federal Funds rate, Global, Inflation, Interest rate, Interest rate gap, Interest rate pass-through, Monetary policy of the United States, Monetary policy rate, Monetary policy rates to rate, Monetary policy response, Monetary policy transmission, Official dollarization, Rates to rate, Taylor rule, U.S. dollar rate, Uncovered interest parity, World interest rate, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/129
Stock No:

WPIEA2011129
ISBN:

9781455258390
ISSN:

1018-5941

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