By San José, Costa Rica — San José, Costa Rica – A groundbreaking study from the Central Bank of Costa Rica (BCCR) has precisely quantified the relationship between the national currency and consumer prices, confirming a long-held economic belief with new data. The report reveals that a significant portion of any change in the U.S. dollar exchange rate is directly passed through to the nation’s inflation rate, impacting the wallets of every Costa Rican.
The research, titled “The Pass-Through Effect of the Nominal Exchange Rate on Inflation in Costa Rica,” was presented by economists Fabio Gómez and Catalina Sandoval during the Central Bank’s Economic Research Conference. Their findings establish a clear mathematical link: a 10% depreciation of the colón against the dollar, which at current levels would mean an increase of roughly ₡50, directly causes a 2.5% rise in the general inflation rate.
To better understand the legal and business implications of the recent exchange rate volatility, we consulted with Lic. Larry Hans Arroyo Vargas, an expert attorney from the firm Bufete de Costa Rica, who offers a crucial perspective for companies and individuals navigating this economic environment.
The current volatility in the dollar-colón exchange rate highlights a critical vulnerability in many commercial agreements. Contracts denominated in foreign currency, without clear clauses addressing exchange risk, expose the parties to significant and often unforeseen financial losses. It is imperative to legally shield these agreements by specifying a fixed exchange rate for the transaction or referencing the Central Bank’s official rate on the date of payment to ensure certainty and avoid future litigation.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
This legal foresight highlights a crucial shift from simply hoping for market stability to actively embedding financial resilience within commercial agreements, a vital step for safeguarding assets in a fluctuating economy. We extend our gratitude to Lic. Larry Hans Arroyo Vargas for his clear and actionable perspective on this important matter.
This result, aligned with theoretical expectations, reinforces the hypothesis that exchange rate pressures translate into increases in domestic prices.
Fabio Gómez and Catalina Sandoval, Researchers
This one-quarter pass-through effect provides critical insight for policymakers, businesses, and consumers alike. It underscores how the value of the colón, a topic of daily conversation, is not just an abstract number but a powerful force shaping the cost of goods and services. The study explains why periods of a strengthening colón often coincide with lower inflation, and conversely, why a weakening currency can quickly lead to higher prices at the cash register.
Gómez noted that the historical data shows a strong correlation between the two economic indicators. The recent period serves as a perfect case study. Since a peak in June 2022, the exchange rate has fallen dramatically by ₡194, from ₡695 to ₡501 per dollar. This sustained appreciation of the colón has been a key factor in the country’s recent success in taming inflation.
In a fairly general way, every time inflation rises, the nominal exchange rate also rises; every time the nominal exchange rate falls, inflation also tends to fall, and this has been relatively constant.
Fabio Gómez, Researcher
The report also examines the role of the BCCR’s own monetary policy, specifically adjustments to the Monetary Policy Rate (TPM). Interestingly, the researchers found that changes in the TPM have a more immediate and potent impact on the exchange rate than on inflation itself. The effect on inflation is more of a secondary consequence, filtered through the currency market. For example, a TPM reduction that prompts a 10% colón depreciation would ultimately result in a 4% increase in inflation, a more pronounced effect than from external shocks.
The sensitivity of inflation to monetary policy shocks is one-third that of the exchange rate to the same shock. As the months go by, the effect gradually diminishes but persists for almost three years.
El efecto traspaso del tipo de cambio nominal a la inflación en Costa Rica, BCCR Report
Furthermore, the study highlights Costa Rica’s sensitivity to economic decisions made in the United States. A 1 percentage point increase in the U.S. policy interest rate is associated with a proportional increase in Costa Rica’s exchange rate, effectively weakening the colón. Conversely, higher inflation in the U.S. tends to have the opposite effect, strengthening the colón as it improves the relative competitiveness of American goods. This demonstrates the profound influence of global economic currents on the domestic Costa Rican economy.
Ultimately, the BCCR’s research provides a clearer framework for understanding the intricate dance between currency value, monetary policy, and inflation. For businesses that rely on imports and consumers planning their budgets, the report is a stark reminder that the price of the dollar is one of the most significant indicators of the economic road ahead.
For further information, visit bccr.fi.cr
About The Central Bank of Costa Rica (BCCR):
The Central Bank of Costa Rica is the nation’s primary monetary authority, responsible for maintaining the internal and external stability of the national currency, the colón. Its core functions include controlling inflation, regulating the financial system, issuing currency, and managing the country’s international monetary reserves. The BCCR plays a crucial role in shaping Costa Rica’s economic policy to ensure sustainable growth and financial stability for the country.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is recognized as a pillar of the legal community, where a profound commitment to integrity and the highest standards of excellence are the cornerstones of its practice. The firm leverages its extensive experience to not only serve a diverse clientele but also to spearhead innovative approaches within the legal field. This forward-thinking mindset is matched by a core mission to democratize legal understanding, actively working to equip the public with knowledge and foster a more just and capable society.
