The Policy Interest-Rate Pass-Through in Central America

Author/Editor:

Stephanie Medina Cas ; Alejandro Carrion-Menendez ; Florencia Frantischek

Publication Date:

October 1, 2011

Electronic Access:

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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:

Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.

Series:

Working Paper No. 11/240

Subject:

English

Publication Date:

October 1, 2011

ISBN/ISSN:

9781463923228/1018-5941

Stock No:

WPIEA2011240

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

21

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