Browsing by Author "Méndez-Quesada, Eduardo"
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- La dolarización parcial en Costa RicaIn this paper, we study the extent and explore the causes of the increasing preference to foreign currency deposits as store of value and medium of exchange in Costa Rica, a country with relatively social and macroeconomic stability and no events of deposits confiscation or recent episodes of crisis. The ratio of foreign currency deposits to total deposits has risen sharply and has reached around 50 percent in 2002. We analyze monthly data since 1990 to 2002 by computing broad indicators of dollarization and ratios of deposits in foreign and domestic currency of various degrees of liquidity. The paper identifies the determinants that have driven the dollarization process in Costa Rica (institutional and economic factors and those resulting of monetary and exchange rate policies), and explicitly assess the noted persistence in the use of foreign currency; this hysteresis, or asymmetric substitution process between monies, is modeled through the inclusion of a ratchet variable. The econometric results indicate that the interest rate for foreign denominated assets and the expected exchange rate devaluation (with positive effects) and the interest rate differential in favor of domestic currency deposits (with negative effects) are significant determinants of dollarization in the Costa Rican economy as theory predicts. This suggests that monetary policy may still have an impact on the portfolio decisions of the private sector; however, given the significance of the ratchet variable for the deposit ratio, particularly strong policies would need to be pursued over an extended period of time so as to convince deposit holders to switch back to colon-denominated assets since the economy seems has reached a degree of dollarization that would make the process asymmetric and difficult to reverse. In addition, results suggest that the exchange rate system of crawling peg adopted since 1983 and the measures adopted since 1996, specially lower banking reserve requirement for foreign currency deposits, and the possibility to grant credit in foreign currency with a regime of factional reserve requirement, stimulated the secondary banking creation of deposits, and hence both were factors that contributed to the process of dollarization.