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 .
From the concluding remarks of the study entitled "El Salvador: Determinants of interest rates" by Alirio Alfonso Fernandez:
Slow recovery tied to a lagging U.S. economy, 3% growth in 2010 due to increased domestic consumption and rising remittances and international trade.
The countries in Central America are recovering gradually, led by a rebound indomestic demand (following its sharpcontraction in 2009), which has partly spilled over into imports. Pickups in exports and morerecently remittances have been further positive developments.
Central America may be directly impacted by the slowdown in the recovery of the world economy.
For the time being, the region's measures of external and internal demand do not seem affected by the threat of lower growth rates for the economies of partner developed countries.
Good news for importers and store owners, bad news for exporters. Governments cannot afford to ignore this problem.
The causes of the appreciation in the value of Latin American currencies relative to the United States dollar are varied. The main reason is the current weakness of the US economy and the low expectations of a quick recovery.
The recent increase in the value of the Costa Rican colon versus the dollar is worrisome, not only because there are no clear reasons to explain it, but also because it would be hard to contain it without causing greater problems.
In the past weeks, and without apparent reason, the price of the U.S. dollar in Costa Rica dropped considerably.
As in Orwell’s fable, Central Banks assume the task of deciding who, among equals, “is more equal than others”.
Paul Laurent Solís analyzed the anathema that has become the label “tax haven”, and remarked the role Central Banks have assumed in Central American economies, especially when they become tools for whichever government that happens to be in power.
“When markets are moving a lot, be prudent. When they remain still, be double prudent”.
In countries with domestic currencies, changes in the exchange rate are always a reason for concern. Economic and financial agents are eager to understand why such fluctuations occur, in order to hedge and if possibly benefit, from them.
Fitch Ratings warned that although Central American sovereigns have resisted the global crisis pretty well so far, they now require fiscal consolidation in order to maintain their credit ratings.
Summary
Fitch‐rated Central American sovereigns have thus far withstood the destabilizing effects of the global economic and financial crisis, despite monetary and exchange rate policy challenges. 1 Nevertheless, weaker public finances could lead to negative rating actions if fiscal consolidation is not achieved over the medium term.
"Almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own".
This phrase by John Stuart Mill is the header of an analysis on the subject published by the Central American Monetary Council.
In it, they attempt to answer the following questions: It there justification for Central American countries to have their own currencies? Which monetary options do these countries have? Wouldn't it be more convenient for them to use a unified currency, either a proprietary one or an existing like the U.S. dollar, Euro or Yen? What are the required steps towards a monetary union?
Although recent public opinion has focused on what went wrong with securitization, it is important to recognize the many benefits associated with sound securitization.
Global Financial Stability Report (GFSR), October 2009 - Chapter 2
Key points:
Sound securitization provides important benefits—to allocate credit more efficiently, transfer credit risk away from banking sector to more diversified investors, and more finely tailor risks and returns to potential end investors.
"I wish that it would be someday!" said Mexican president Felipe Calderon, pointing out that Latin America has very distinct economic and monetary policies.
He also highlighted the various exchange rate and monetary systems. "There are countries which have their own currency and the corresponding seigniorage; and there are countries which used other countries' currencies, such as El Salvador or Ecuador, which have their economies in US dollars.
In order to reduce the effects of the economic slow down, some politicians are turning to monetary policy or the Central Bank. They believe that by printing more money there will be more wealth, more investment and more employment.
When a Central Bank, such as the US Federal Reserve (FED) or the European Central Bank, increases the amount of money in circulation it is done by reducing interest rates. This excess liquidity is channeled firstly towards the financial system, causing an excess in credit which forces the financial institutions to reduce or relax credit requirements for its clients in order to reduce its monetary reserves caused by the excess liquidity that was created by the Central Bank policy of "easy money". Nonetheless, this "easy money" policy cannot be maintained because printing more money can NEVER generate greater wealth. All excess liquidity eventually translates into a "bubble", or a increase in the rate of inflation, or both.
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