Title Official dollarization as a monetary regime : its effects on El Salvador / Andrew Swiston

Published [Washington, D.C.] : International Monetary Fund, ©2011

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Description 1 online resource (26 pages) : illustrations Series IMF working paper ; WP/11/129 IMF working paper ; WP/11/129. Contents Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Dollarization and Currency Risk; A. Deriving the Currency Risk Premium Under Uncovered Interest Parity; B. Drivers of the Currency Risk Premium Under the Peg; 1. Interest Rates and Spreads Under the Peg; 1. Descriptive Statistics of Interest Rates Under the Peg; 2. Determinants of Colón-Dollar Spreads Under the Peg; C. Effects of Dollarization on Nominal Interest Rates; 2. Colón-Dollar Spreads: History and Counterfactual Predictions; 3. Net Savings from Lower Interest Rates Under Dollarization D. Magnitude of Foregone Seigniorage4. Costs of Foregone Seigniorage and Benefits of Lower Interest Rates; III. Dollarization and Cyclical Stabilization; A. Costs and Benefits for El Salvador; 5. Monetary Policy Response to Inflation and Output; B. Cross-Country Comparisons; 6. Dollarized Economies: U.S. Monetary Policy Comovement with Inflation and Output; 7. Central America: Monetary Policy Response to Inflation and Output; IV. Dollarization and Monetary Policy Transmission; A. Pass-through in El Salvador; 3. Pass-Through of Monetary Policy Rate to Commercial Bank Rates B. Cross-Country Comparisons8. Interest Rate Pass-Through in Economies Using the U.S. Dollar; 9. Central America: Pass-Through to U.S. Dollar Interest Rates; 10. Central America: Pass-Through to Domestic Currency Interest Rates; C. Factors Explaining Pass-Through; 4. Factors Affecting the El Salvador-U.S. Interest Rate Gap; 11. El Salvador and Panama: Factors Affecting the Interest Rate Gap; V. Conclusions; References; Footnotes Summary This paper examines El Salvadors 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 1/4 percent of GDP for the private sector and 1/2 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 Bibliography Includes bibliographical references Notes English Subject Dollarization -- El Salvador -- Econometric models Interest rates -- El Salvador -- Econometric models Foreign exchange rates -- El Salvador -- Econometric models Foreign exchange rates -- Econometric models Interest rates -- Econometric models El Salvador Form Electronic book Author International Monetary Fund. Western Hemisphere Department, issuing body. ISBN 128356162X 9781283561624 9781455282548 1455282545 9781455258390 1455258393 1462392970 9781462392971 9786613874078 6613874078 1462302165 9781462302161

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