Bands on Exchange Rate Are Stretched to ¢100

October 16, 2009

The Central Bank of Costa Rica adjusted the breadth of the exchange rate vis-a-vis the United States dollar this week, raising the ceiling value to ¢600 to $1. The floor value that a dollar can be exchanged for is ¢500, and dollars can be bought or sold anywhere within the ¢100 range on Monex, the domestic money market. When the system of the bands was initially created in 2006, the width between the ceiling and floor was only ¢15.44.

 

 

The widening of the admissible range for the exchange rate is evidence of the continuing intervention of the Central Bank (BCCR) to keep the rate from further increases and to limit the amount of dollars in the Costa Rican financial market. When there are larger quantities of U.S. dollars in the Costa Rica economy, the colón devalues. In order to limit devaluation of the colón, the BCCR buys dollars from the marketplace and redistributes colones into the economy. Though more colones are circulated in the economy, U.S. dollars accumulate in the BCCR reserves and remain in the Costa Rican economy. This means the purchase of dollars serves more as a camouflage than an actual solution.

 

 

“The problem with have a ceiling limit is that there is a lot of pressure for the BCCR to keep selling dollars to the economy,” said Carlos Arguedas, professor of economics at theNationalUniversity. “Loans are going to continue to rise, and somehow the BCCR is going to have to maintain the limited amount of dollars in the economy. This could stifle the economy. If the economy begins to suffer with the ceiling rate, the BCCR will have to change the ceiling to a higher amount, which will open the market back up to the flow of more dollars. The ceiling is a good idea in principle, but it is difficult to manage.”

 

 

–Adam Williams

 

 

 

 

 

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