• 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.