www.CostaRicaTicas.com

Since I only had one semester of Economics in college, I'm not that well versed in how Costa Rica seems to have stabilized the Colone. Since they did something (I don't know what) the colone has stayed at around 515 for several months after an annual rise of around 12-13% for as long as I can remember. any Economics majors out there to explain how they did it?

I am definitely not an economics major, but the US dollar has been on a slide for a quite a while. I think perhaps when CR undid the automatic adjustments there was probably some slack to take up, which is what I think is happening now. Eventually I expect the Colon will start to lose ground again, but perhaps with the US budget and trade deficits, US inflation will match Costa Rica's.

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Since I have a BS in Economics, let me take a shot. I knew this degree would eventually be useful.

In the past, CR was using a fixed exchange rate system. It's a rigid system where the central bank basically determines the rate, and so a periodic change could be, like you said, 12-13%, depending on their efficiency, or inefficiency, among other things.

Last year, they switched to a floating system. A floating system is always (daily, maybe even intra-daily) changing, or correcting, by even a fraction of a basis point based on supply and demand for colones in the foreign exchange market. The market determines the exchange rate. This system is called "self-correcting" because it's makes small adjustments to help level things off. I couldn't think of an example but I found one online. For example, if demand for colones is low then the value decreases and imported goods become more expensive to buy in CR, so the demand for local goods rises thus increasing jobs. That's one self-correction. It doesn't allow the colone to slide 12% by counter-acting the low demand almost immediately.

Not to be the bearer of doom and gloom but there was an article in La Nacion about a month ago that said the CR Central Bank was artificially propping up the colon. The article stated that the Bank had poured 915 Million (USD) into the market and that had the colon been allowed to float without interference the rate would be 544. How accurate the article was I do not know.

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And is it not true that the exchange rate is based on the stability of the gov't too? Usually, if the gov't becomes threatened or instable for whatever reason, the demand for the currency drops so the currency gets cheaper, however if as ID pointed out the CR gov't uses the stash of dollars that we all bring to CR to buy their own money "off the currency market" it would counter the decline in demand so the value stays near the same.

There is a point where if the gov't becomes too instable, the central bank can't afford to buy (prop up) the currency so without the central banks involvement, the currency takes a huge hit. The job of the central bank is to weather the storms so to speak - sometimes the storms are too big to weather.

Considering CR has no military and no rare natural resources (fruit isn't rare) that another country would want - there is no reason for the gov't to fail due to attack by another country so this gives CR stability. They can create their own instability - corrupt Presidents and gov't within does have a bearing on stability.

After one considers stability with respect to currency, then one can take into account the interest rates the central bank charges, imports and exports, tariffs, money supply (how many colonies are outstanding) and a lot more to decide how much the colony is worth.



Just as the value of the dollar is based on what our gov't/economy/interest rates are, the value of the colony has more to do with what is happening within Costa Rica not what our policies are. In other words, if the colony raises in value, it is because CR is doing the right stuff, it isn't that the USA isn't doing the right stuff.

Consider Brazil - five years ago it was 4 real (spelling) to 1 dollar and now it is 2 real for $1.90. The reason the real gained in value (200%) is about what Brazil has done to make their currency worth more (stable gov't/imports/export/interest rates/etc.).

Money supply is a huge factor - if a gov't prints too much money, the supply out paces demand so the value on the currency markets will decline.

Now where in the World could that concept be happening

Exchange-rate:

I am no money market expert: but I do have a minor in economics and finance. And have played around in the financial world for the last 35 years. A quick look at the money market would indicate that two things are going on here. Costa Rica is propping up the value of their currency. They are using US dollars (that we helped put into their economy) to buy Costa Rican currency on the Open market. At the same time the currency they are using to buy back their currency is declining in value. That would be the US dollar. That situation will not change till we get a new president and bring our troops home. No one pays attention to you if you don't have a big stick. Our big stick is currently occupied. I

I'm impressed by the knowledgeable replies from our members. Costa Rican currency is stable because there propping it up and what were comparing it to is declining. I agree that what Costa Rica is doing looks good in the short term but has the potential to come back and bite. The US dollar will rise in the long run. Meaning at sometime down the road it will all balance out and that 12 to 15% you've seen in the past will be the average.

If I remember correctly Costa Rica has a new president in the last year. His plan is to keep the Colone stable till the next election so that his party can get reelected. Neglecting to mention that after about five years they'll be out off dollars and there will be a substantial decline.

Lee

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I don't know if costa rica is artificially keeping the colone strong or not but most of the worlds currency is getting stronger against the dollar. Why would costa rica be different in that regard?

Under the old system the dollar would now be worth around 570 colones or so. So for dollar holders and especially people on a fixed dollar income they have lost 10% of their buying power already. Bad news if the trend continues.

The flip side is that this change was supossed to stop inflation(that will never happen) but inflation seems to have slowed according to the paper.
Even with less inflation factored in this has been bad for dollar holders.

Oh and if you are thinking about changing your dollar accounts here into colone accounts the interest paid on colone accounts has dropped from 15% to 6% according to La Nacion.

Most of us will not live long enough to see a strong dollar, even the lowly canadian dollar is up to 94. george has dug us into a deep deep hole with his fiscal policies or lack of.

The dollar would skyrocket if US interest rates increased. Regardless of one's feelings toward the current administration, our gov't is stable, our economy has been strong for at least five years, unemployment is not an issue, the stock market is at record levels so my feeling is that our low interest rates results in a low dollar.

If the fed increased interest rates, to the levels of other countries, the dollar would skyrocket. Brazil for example charges 25% to 30% for personal loans and home loans are unheard of - the same model exists around the world. It isn't always as bad as 25%, but it is way higher than in the USA.

If the fed did increase interest rates, investors from around the world would buy dollars and sock them into our banks since when the fed increases rates, the banks pay more interest to interest bearing accounts as well other currency related investments. Our currency wouldn't be held just because of our stable gov't and economy, but for the investment purpose as well.

The dollar's decline isn't about this administration. All I'm saying is that a low dollar considering that our economy/stock market/stability/job market are great isn't worth a complaint. Finding a complaint is what being American is all about though, right? If the dollar were strong and the stock market was down or the job market was crap, it would again be the administration (no matter what administration is was). Rarely is the world perfect. A lot of the time, economic issues, especially the dollar which is held by nearly every gov't around the world isn't about a single administration. The global economy, the American economy is far bigger than any administration.

Take your pick, high interest rates for cars, houses, personal loans, RVs, boats, and everything else or a high dollar. Want to pay 15% interest on your new car even if you have good credit? It is a trade off. There are many trade offs. In some cases, a high dollar is great, in other cases it is a pain in the a$$. The same applies to a low dollar - good and bad depending on who you are, where you go, what you buy.

The stability of the colone has resulted from an influx of dollars into the Costa Rica...period. The Central Bank of Costa Rica is awash in dollars. (More than they want. The Central Bank does NOT want the dollarization of the economy and is trying to encourage loans be done in colones.)

The mechanics is, then, when you go to the 'window' the Central Bank says we will 'only' give you say...518 for you dollar...why should we give you more? As long as there is a 'line' at the window trading in dollars for colones, the lid will be on the colone.

This is NOT good for those in the market for local pu*sy

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the dollar remains stable vs. the colon, but the dollar is in a freefall against the colombian peso...down some 25 % since last aug......see ya guys soon back on c.r. soil, as i cant absorb the peso demise, So "I shall return"".


ziggy

Master Zig- I hope I am there when you are. Definately for Labor Day and hopefully the middle of July.

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I've got a B.A. in Economics so let me talk like economists talk.

There is the short run and the long run to consider.

The inflation rate of the dollar is about 2% to 3% now and is generally expected to remain there. Let's call it 2%. The inflation rate of the colon is about 9% to 10%. Let's call it 9%. Let's assume that it is generally expected to remain there. The difference is about 7%. In the long run, the main cause of devaluation of one currency against another (or appreciation of one currency against another) is the differential inflation rates of the two currencies, both now and the rates expected in the future. It is highly probable that in the long run the dollar will continue to appreciate against the colon due to probable higher inflation rates in the colon than in the dollar. The Euro is also likely in the long run to appreciate against the colon, and for the same reason.

In the short run, there can be several different factors which effect currency appreciations or devaluations. One of these can be a government propping up its currency. This may be happening in Costa Rica. If so, sooner or later they will run out of dollars and will have to stop. Then there could be a big catchup move. Of course that big move could begin before they run out of dollars because speculators could sense that they may run out of dollars soon and thus bid up the dollar in advance.

Another short term reason could be that interest rates are very low in the United States, but very high in Costa Rica, and this rate differential could be large enough to more than make up for the loss in real currency value in the colon caused by inflation.

Back to the long run in Costa Rica. There is some evidence that Costa Rica is making progress in decreasing its deficit. Income has been up substantially so far this year (tax collections up for one), and expenses have slowed their rise quite a bit. This could decrease the future inflation rate, since the Costa Rican government would not need to print so much money. Speculators may be betting that Arias will be able to sustain this trend, thus we may actually be seeing a slowing of the long term inflation rate differential, which would likely result in a slowing of the long term devaluation rate of the colon against the dollar.

It is highly likely that one of these days the devaluation of the colon will resume, and you will be able to get more colons for your dollar. However, it also may very well be that the devaluation rate will be slower than before.

Cant wait to see you again, Miss you, mi amigo!!!

What the hell happened to the colombian peso, both short term, and long term.......please explain, as I think you have a handle on the economics of the buck!!!