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Official Dollarization As a Monetary Regime: Its Effectson El Salvador

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  • Mr. Andrew J Swiston

Abstract

This paper examines El Salvador’s 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 ½ percent of GDP for the private sector and ¼ 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.

Suggested Citation

  • Mr. Andrew J Swiston, 2011. "Official Dollarization As a Monetary Regime: Its Effectson El Salvador," IMF Working Papers 2011/129, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/129
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    References listed on IDEAS

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    Cited by:

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    2. Cachanosky, Nicolás & Salter, Alexander W. & Savanti, Ignacio, 2022. "Can dollarization constrain a populist leader? The case of Rafael Correa in Ecuador," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 430-442.
    3. Arslan Razmi, 2022. "Unilateral currency union with a high-income area: the case of Montenegro," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 19(1), pages 31-61, June.
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    5. Ricardo Hausmann & Ugo Panizza & Carmen Reinhart & Douglas Barrios & Clement Brenot & Jesus Daboin Pacheco & Clemens Graf von Luckner & Frank Muci & Lucila Venturi, 2023. "Towards a Sustainable Recovery for Lebanon's Economy," CID Working Papers 439, Center for International Development at Harvard University.
    6. Rivera-Solis, Luis Eduardo, 2012. "Dollarization in El Salvador: Revisited," MPRA Paper 60087, University Library of Munich, Germany, revised Jan 2012.

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