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The determinants of interest rate spreads in dollarized economies

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  • Julián P. Díaz
  • Juan Francisco Rumbea Pavisic

Abstract

Twenty years after dollarizing, interest rate spreads remain considerably high in El Salvador and even higher in Ecuador, despite decreased deposit rates. Using panels covering the 2005–2019 period, we explore the determinants of interest rate spreads in these two dollarized countries. We find that bank-specific characteristics, such as market share and liquidity, play a significant role at accounting for the differences in spreads. Dollarization is also expected to promote the entry of international banks due to the elimination of depreciation risk. We find that the low degree of foreign bank participation in Ecuador also contributes to explaining spread differences. These findings point out to complementary reforms to extract the full benefits of dollarization.

Suggested Citation

  • Julián P. Díaz & Juan Francisco Rumbea Pavisic, 2023. "The determinants of interest rate spreads in dollarized economies," Applied Economics Letters, Taylor & Francis Journals, vol. 30(17), pages 2473-2480, October.
    • Handle: RePEc:taf:apeclt:v:30:y:2023:i:17:p:2473-2480
    DOI: 10.1080/13504851.2022.2098234
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