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Mr. Andrew J Swiston, Ms. Florencia Frantischek, Mr. Przemek Gajdeczka, and Alexander Herman

approaches to draw common themes. After a review of the role of central bank financial strength in Section II , Section III discusses the institutional environment in which CADR central banks have operated, in particular their functions, episodes of losses, legal reforms, and issues of recapitalization. Section IV presents details on the net income and balance sheets of CADR central banks and the factors driving their evolution. Section V examines capital adequacy under two approaches. First, is central bank capital sufficient to support announced policy objectives

Mr. Andrew J Swiston, Ms. Florencia Frantischek, Mr. Przemek Gajdeczka, and Alexander Herman
This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.
Mr. Andrew J Swiston, Ms. Florencia Frantischek, Mr. Przemek Gajdeczka, and Alexander Herman

Front Matter Page Western Hemisphere Contents I. Introduction II. The Role of Central Bank Financial Strength III. Overview of CADR Central Banks A. Historical Roles and Recent Changes B. Recapitalization: Legal Statutes and Recent Initiatives IV. Financial Positions A. Income Position B. Balance Sheets C. Comparison with LA-5 D. Factors Influencing the Financial Position V. Capital Adequacy A. Economic Capital B. Capital Adequacy: Consistency with Low Inflation C. Capital Adequacy: Baseline Projections and Risks

Mr. Alejandro Carrion-Menendez and Ms. Florencia Frantischek
Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.
Ms. Stephanie C Medina Cas

With the exception of Nicaragua, countries of the Central America and the Dominican Republic (CADR) region recorded lower inflation than did other Latin American countries in the 1980s and 1990s ( Figure 6.1 ). 1 However, despite efforts beginning in the mid-1990s to strengthen the institutional frameworks for formulating and executing monetary policy, inflation in CADR has been higher than inflation in other Latin American countries since the early 2000s, and more volatile and vulnerable to external shocks. CADR central banks have tended to raise interest

Mr. Alejandro Carrion-Menendez and Ms. Florencia Frantischek

Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.

Mr. Alejandro Carrion-Menendez and Ms. Florencia Frantischek
Several Central American (CADR) countries with independent monetary policies are strengthening their monetary frameworks and some have implemented or are moving towards inflation targeting (IT) regimes. Strengthening the monetary policy frameworks of CADR is key to improving the effectiveness of monetary policy. The paper reviews the literature on the reforms needed for strengthening the monetary policy frameworks, and examines the experiences of IT countries, Chile, Peru, and Uruguay to help distill lessons for CADR. It also constructs an index to measure the relative strength of the monetary policy framework of CADR countries.
Mr. Alejandro Carrion-Menendez and Ms. Florencia Frantischek

I. I ntroduction In the 1980s and 1990s, CADR countries (except Nicaragua), had lower inflation rates than other Latin American countries ( Figure 1 ). 2 However, despite efforts to strengthen the institutional frameworks for formulating and executing monetary policy since the mid-1990s, inflation in CADR has been above inflation in other Latin American countries since the early 2000s, and more volatile and vulnerable to external shocks. CADR central banks have tended to raise interest rates less than what was required to tame inflation pressures and some