Official Dollarization As a Monetary Regime: Its Effectson El Salvador
IMF Working Papers, June 1, 2011
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- Official Dollarization As a Monetary Regime: Its Effectson El Salvador
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Bibliographic details
- Authors: Andrew J Swiston
- Published: June 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455258390.001
Summary findings
- Dollarization lowered commercial bank interest rates by 4 to 5 percent by reducing currency risk.
- Net annual savings from lower interest rates:
- Private sector: averaging ½ percent of GDP.
- Public sector: averaging ¼ percent of GDP (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 greater stabilization of economic activity under dollarization than under the prior peg and than in Central American countries with independent monetary policy.
- Dollarization does not appear to have affected the transmission mechanism: 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.
Interest rate analysis and framework
- Analytical framework: commercial bank interest rates analyzed under an uncovered interest parity framework.
- Key quantitative result: a reduction in interest rates of 4 to 5 percent attributed to reduced currency risk following dollarization.
- Pass-through: monetary policy pass-through to commercial interest rates remained similar to that observed under the peg and in other Central American countries.
Macroeconomic stabilization and Taylor-rule evidence
- Estimated Taylor rules indicate:
- A strong positive association between Salvadoran output and U.S. Federal Reserve policy since dollarization.
- Dollarization has served to stabilize economic activity more than the fixed peg did in the 1990s and more than policy rates in Central American countries with independent monetary policy have done.
Fiscal and private-sector effects
- Annual savings from reduced interest rates:
- Private sector: averaging ½ percent of GDP.
- Public sector: averaging ¼ percent of GDP after accounting for foregone seigniorage.
Publication and metadata
- Author: Andrew J Swiston
- Publication date: June 1, 2011
- Series: IMF Working Papers, Working Paper No. 2011/129
- Pages: 25
- Volume: 2011
- Issue: 129
- DOI: https://doi.org/10.5089/9781455258390.001
- ISBN: 9781455258390
- ISSN: 1018-5941
- Subject keywords: Central bank policy rate, Commercial banks, Currencies, Dollarization, Financial institutions, Financial services, Inflation, Monetary policy, Money, Prices
- Additional 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
Source: Official Dollarization As a Monetary Regime: Its Effectson El Salvador, Andrew J Swiston, IMF Working Papers 2011, 129 (2011).