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Official Dollarization As a Monetary Regime

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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; monetary policy; inflation; monetary regime; independent monetary policy; central bank; monetary fund; domestic monetary policy; macroeconomic performance; transmission of monetary policy; nominal interest rates; rate of inflation; reserve requirements; monetary regimes; monetary economics; monetary aggregates; monetary authority; money supply; macroeconomic crises; foreign currency; rates of inflation; relative price; independent monetary policies; monetary system; domestic money supply; inflation targeting; higher rate of inflation; real interest rate; monetary policies; real output; central american monetary council; optimal monetary policy; real interest rates; monetary systems; monetary authorities; monetary transmission; monetary transmission mechanism;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
    2. Edwards, Sebastian & Magendzo, I. Igal, 2006. "Strict Dollarization and Economic Performance: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 269-282, February.
    3. P. Siklos & M. Bohl, 2006. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Working Papers eg0053, Wilfrid Laurier University, Department of Economics, revised 2006.
    4. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
    5. 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.
    6. Carl E. Walsh, 2009. "Inflation Targeting: What Have We Learned?," International Finance, Wiley Blackwell, vol. 12(2), pages 195-233, 08.
    7. David F. Hendry & Bent Nielsen, 2007. "The Bernoulli model, from Econometric Modeling: A Likelihood Approach
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    8. David F. Hendry & Bent Nielsen, 2007. "Preface to Econometric Modeling: A Likelihood Approach
      [Econometric Modeling: A Likelihood Approach]
      ," Introductory Chapters, Princeton University Press.
    9. André Van Poeck & Jacques Vanneste & Maret Veiner, 2007. "Exchange Rate Regimes and Exchange Market Pressure in the New EU Member States," Journal of Common Market Studies, Wiley Blackwell, vol. 45, pages 459-485, 06.
    10. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
    11. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments," IMF Occasional Papers 261, International Monetary Fund.
    12. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, 07.
    13. Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2002. "Sargent-Wallace Meets Krugman-Flood-Garber, or: Why Sovereign Debt Swaps Don't Avert Macroeconomic Crises," NBER Working Papers 9190, National Bureau of Economic Research, Inc.
    14. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.
    15. Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through," IMF Working Papers 03/112, International Monetary Fund.
    16. Andrew Swiston, 2010. "Spillovers to Central America in Light of the Crisis," IMF Working Papers 10/35, International Monetary Fund.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Dollarization
      by UDADISI in UDADISI on 2012-07-09 01:44:00

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