Dollarization and Parity of Internal and External Interest Rates

A study of the evolution of interest rates in El Salvador over 37 years concludes that dollarization confirms the theory of parity between domestic and international interest rates .

Thursday, July 25, 2013

From the concluding remarks of the study entitled "El Salvador: Determinants of interest rates" by Alirio Alfonso Fernandez:

"An Interest rate represents the price of money and is an indicator which takes into consideration economic agents when making decisions on consumption, investment and savings, variables which influence economic growth and inflation.

In a small open and dollarized economy, there is no power to affect the level of international prices, domestic prices are affected by real and financial external shocks, there is no possession of its own currency. Temporary liquidity mismatches are offset by changes in the position of foreign assets.

More on this topic

Costa Rica's Economy Becoming Increasingly Vulnerable

May 2016

The IMF points to a greater vulnerability in the financial sector because of credit expansion in dollars and on the macroeconomic level because of the inability to reduce the fiscal deficit.

From a press release issued by the IMF:

On May 11, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Costa Rica.

Why It Would Be Impossible to de-Dollarize El Salvador

June 2012

An Argentine expert predicts that if the Salvadoran economy abandons the dollar it would trigger serious social upheaval ... and Argentines know all about that...

An article in by Eduardo Levy Yeyati, former official of the International Monetary Fund (IMF) and the World Bank, and "who has conducted research on the causes and consequences of dollarization, the behavior of markets in times of crisis and of monetary and exchange rate regimes, said a freeze on bank withdrawals in the country would be accompanied by a pronounced economic downturn, which would be associated with an imbalance in the payment system, ie, lack of liquidity. "

Costa Rica Considers Dollarization

July 2010

The Costa Rican Legislative Assembly is to review a proposed law that “will protect the purchasing power of Costa Rican salaries and pensions”.

An opposition congresswoman from the ML political party submitted the proposal, which would “dollarize” the Costa Rican economy and take away some responsibilities from the Costa Rican central bank, such as that of regulating monetary policy.

Nobody Wants to Dollarize In Guatemala

June 2010

In a strange unanimity, government officials agree with independent economic analysts: dollarization is inconvenient for Guatemala.

That the Guatemalan Central Bank argues against dollarization is no surprise for anyone, as its very reason for existence is questioned with it.

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