• On January 1, 2001, El Salvador became the third
Latin American country to abandon its own currency in favor of the dollar
• Other two Latin American nations to convert to the dollar:
• Ecuador in September 2000 and Panama since 1904

• El Salvador has elected to turn monetary policy over to the U.S. Federal Reserve
• Full dollarization was expected to enhance the set of previous structural reforms put in place to support economic stability and thus attract foreign investors

• Ensures relatively low inflation
• Low inflation increases the security of private property, which in turn translates into lower interest rates
• Consumers can spend more, local businesses are able to invest and obtain financing at more favorable rates

• Elimination of exchange rate risk, contributing to the decline of the country risk premium and interest rates
• As well as the reduction of the inflation rate and inflationary expectations
• These outcomes are expected to encourage foreign investment and a stable capital flow

• By adopting the dollar as legal tender, El Salvador has effectively lost control of its money supply
• Elimination of a true central bank means that El
Salvador does not have a lender of last resort
• The Salvadorean central banking system is constrained by the amount of dollars it holds in reserve, it cannot print new money to keep up with demand

• Elimination of the governments ability to generate seigniorage
• Seigniorage- revenue from issuing domestic money to finance its fiscal deficit
• Without this possibility, the dollarizing country must look for alternative revenue sources or reduce government expenditures
• Giving up control of its money supply, a full dollarization regime encourages fiscal discipline, enhancing policy credibility, but also constrains the fiscal response to stabilize the economy in difficult times

• Maintaining a Floating Currency.
• Currency with fixed exchange rate.
• Coexistence of currencies.

 Price Stability.
 Ease of trade.
 Closer ties among Central American countries.

 Pricing of consumer items.
 Consumer adjustment to currency.
 Loss of national identity.

How the US recession affects El Salvador.
http://www.youtube.com/watch?v=0NR8Lv0p7Uo

Thank You
Any Questions?

 Bloch S. David, Nelson William Robert, “Dollarization in El
Salvador The Costs of Economic Stability”, World Trade Executive
Inc, 2003.
 Quispe-Agnoli Myriam, Whisler Elena, “Official Dollarization and
the Banking System in Ecuador and El Salvador”, Economic Review,
Federal Reserve Bank of Atlanta, 2006.