Search results

CENTRAL AMERICAN COUNTRIES ARE CURRENTLY SUFFERING SOME OF THE MOST SEVERE BALANCE-OF-PAYMENTS CRISES OF THEIR HISTORIES. SOME OF THIS IS CAUSED BY THE SOCIAL AND POLITICAL STRIFE BURDENING THE REGION. HOWEVER, SOME BALANCEOF-PAYMENTS PROBLEMS MAY BE ASSOCIATED WITH ECONOMIC CONDITIONS WHICH ARE INDEPENDENT OF POLITICAL DIFFICULTIES, AND WHICH HAVE BEEN FOUND IMPORTANT IN DETERMINING CURRENT ACCOUNT BALANCES IN OTHER CONTEXTS. THIS PAPER HAS TWO MAIN OBJECTIVES. FIRST, THE AUTHOR DEMONSTRATES THAT EXCHANGE RATES ARE ONE OF THE MAIN FACTORS AFFECTING THE BALANCE OF TRADE IN CENTRAL AMERICA (AND ELSEWHERE) AND THAT OVERVALUATIONS OF THE EXCHANGE RATES IN CENTRAL AMERICA ARE ONE OF THE PRIMARY DETERMINANTS OF BALANCE OF PAYMENTS PROBLEMS IN THE REGION. TO DEMONSTRATE THIS POSITION THE AUTHOR DEVELOPS THE CONCEPT OF "REAL EXCHANGE RATES." A SECOND OBJECTIVE IS TO CONDUCT A DISCUSSION OF EXCHANGE RATE POLICY IN THE CENTRAL AMERICAN CONTEXT. THE DISCUSSION OF REAL EXCHANGE RATES AND STATISTICAL FINDINGS HELPS TO IDENTIFY SEVERAL POINTS WHERE POLICY ATTENTION IS JUSTIFIED. FOR THIS REASON, THE DISCUSSION OF POLICY OCCURS IN THE SECOND PART OF THE PAPER.