The 2008-and-2014 depreciations of the colon regarding the dollar were related to an effect of contraction for the national economy, in which there were increases in inflation and interest rates and a reduction in credits.
In addition, in the labor market, the depreciation was accompanied by a reduction of employment and a contraction of real salaries.
These are some of the conclusions from the Depreciation’s Macroeconomic effects report, prepared by a group of researchers from the Central Bank.
To study the effect on macroeconomic variables in the exchange rate, the case study methodology was used.
In the last 10 years there were two periods in which the exchange rates significantly increased. The first period when from April to August 2008 when the dollar price increased 12.1%. The second period took place from January to May 2014: the nominal exchange rate showed an increase of almost 8.1%.
The researchers illustrated what would have been the performance of some of the main macroeconomic variables if the Central Bank had not made the decision of changing the exchange rate regime in 2006, when it started to use an exchange band rate.
The results of the exercise noted that within the previous regime, inflation would have been about 6 percentage points higher due to the following factors: imported inflation and the transfer of increases in the exchange rate.
As for economic growth, the impact seems evident; however, when analyzed by expenditure components, researchers concluded that exports have grown at a higher average rate, but its impact on aggregate growth had been offset by the effect of imports, which are also growing at a higher rate.
Another exercise was conducted. In that opportunity, it was a simulation of a central bank intervention to increase the nominal exchange rate. 40-million-dollar-a-day reservation purchases took place for 10 days. This would have led to an increase in the exchange rate of 11 colones after 10 days. This situation shows that the effect of the devaluation would have negative effects for the economy, and it brings higher inflation, higher interest rates and a higher fiscal deficit.
Historically Costa Rica has maintained fixed exchange rate regimes, but it was until 2015 when it switched to a more flexible exchange rate regime known as managed float regime.