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.



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From a press release issued by the IMF:

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