Official Dollarization as a Monetary Regime: Its Effects on El Salvador

 
Author/Editor: Swiston, Andrew
 
Publication Date: June 01, 2011
 
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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: 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.
 
Series: Working Paper No. 11/129
Subject(s): Commercial banks | Cross country analysis | Currency pegs | Dollarization | Economic models | El Salvador | Exchange rate regimes | Interest rates | Monetary policy | United States

Author's Keyword(s): dollarization | Taylor rule | monetary policy transmission | interest rate pass-through | currency risk | uncovered interest parity | exchange rate regime
 
English
Publication Date: June 01, 2011
Format: Paper
Stock No: WPIEA2011129 Pages: 25
Price:
US$18.00 (Academic Rate:
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