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

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  • Andrew Swiston
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/129.

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    Length: 25
    Date of creation: 01 Jun 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/129

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    Related research

    Keywords: Dollarization; Commercial banks; Currency pegs; Economic models; Interest rates;

    This paper has been announced in the following NEP Reports:

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    1. Ball, Laurence, 2010. "The Performance of Alternative Monetary Regimes," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 23, pages 1303-1343 Elsevier.
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    1. Dollarization
      by UDADISI in UDADISI on 2012-07-09 01:44:00

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