Costa Rica

Costa Rica had a brief period of exchange rate fixing with limited monetary operations, followed by a long period of more or less frequently adjusted and reorganised exchange rates accompanied by gradual financial sector developments and monetary reform, which laid the basis first for a mix of inflation and exchange rate targeting from 2010 and then for loose inflation targeting from 2015.

Years Targets and attainment Classification
1974-80 exchange rate unified 1974 with peg to USD at previous ‘free’ market rate, from 1976 some transactions allowed at Stock Exchange at slightly wider spreads; monetary policy initially focused on detailed but not comprehensive credit ceilings, then shifted to interest rates (set by central bank) and reserve requirements; central bank lends varying amounts to cover typically large fiscal deficits augmented exchange rate fix AERF
1981-2009 exchange rate peg abandoned, with massive depreciation through 1981 and move to multiple exchange rates, followed by stabilisation programme mid-1982 with monetary tightening via placement of stabilisation bonds with private sector and raising of reserve requirements; end-1983 previous ‘banking’ and ‘free’ exchange rates unified; mid-1980s financial position of central bank weakened by large operating losses; some interest rate liberalisation; from 1984 on depreciations (not pre-announced) of varying size and frequency aimed to achieve and maintain competitiveness (with exchange rate more fixed than targeted); policy slippages and external shocks mean full stabilisation remains elusive, while monetary growth remains subject to fiscal deficits, central bank losses and ineffective control of bank credit growth; inflation varies mostly between 10 and 25%; early 1990s intensified stabilisation and reform efforts, including 1991 end of credit ceilings, 1992 some forex and financial market liberalisation with emergence of interest rate on stabilisation bonds as key reference rate; brief period of managed (only for smoothing) float before exchange rate reverts to frequent adjustments, now based more on targeted or expected than past relative inflation; 1995 some increase in central bank independence; late 1990s slippages especially in fiscal policy, initially poor bond auction mechanism, weakening of reform effort; rising dollarisation; late 2006 crawling peg becomes crawling band, which is rapidly widened; new policy interest rate introduced 2011 loosely structured discretion LSD
2010-14 exchange rate band maintained along with rising focus on price stability, with actual inflation within single digits and mostly within central bank inflation target band; (lower) target overshot then undershot 2014, expectations above band 2014; dollarisation still high but declines inflation with exchange rate targeting IwERT
2015-17 exchange rate band removed 2015, rate still managed but to decreasing extent; inflation target well undershot 2015 and 2016 but expectations remain just within band, target met 2017; inflation targeting remains rudimentary (e.g. exchange rate managed, forex and secondary government securities markets underdeveloped) but central bank now making decisions on basis of 12-18 month ahead forecasts loose inflation targeting LIT

Selected IMF references: RED 1975 pp14-16, 36; RED 1976 pp16-17; RED 1979 pp23-6; SR 1979 p6; RED 1983 pp33-7; SR 1983 pp1-3, 10-12; RED 1984 pp37-9, 48; RED 1985 p41; RED 1985 pp25-6, 35, 49-52; RED 1988 pp23-5; RED 1991 pp24-5, 33-4; RED 1992 pp19-22; SR 1992 pp10, 13, 15, 22; RED 1994 pp10-12, 18; SR 1996 pp3-5, 7, 10; RED 1998 pp7, 12-13, 41, 42; SR 2003 pp6, 15, 22; SI 2004 pp12-14; SR 200-4 pp9, 17; SR 2006 pp15-18; SR 2008 pp5-6, 11-12; RSBA 2009 pp7, 9; SR 2009 pp14, 18-19; SR 2011 pp5, 12; SR 2013 pp4, 5, 20; SR 2015 pp5, 21-3, 28; SR 2016, pp5,20-1; SR 2017 pp6-7, 24-5; SR 2019 pp7, 18, 21.

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