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The Policy Interest-Rate Pass-Through in Central America

  • International Monetary Fund
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    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.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/240.

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    Length: 21
    Date of creation: 01 Oct 2011
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    Handle: RePEc:imf:imfwpa:11/240
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    6. International Monetary Fund, 2007. "Modalities of Moving to Inflation Targeting in Armenia and Georgia," IMF Working Papers 07/133, International Monetary Fund.
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    11. International Monetary Fund, 2011. "Monetary Transmission in Dollarized and Non-Dollarized Economies; The Cases of Chile, New Zealand, Peru and Uruguay," IMF Working Papers 11/87, International Monetary Fund.
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