The Limits to Dollarization in Ecuador: Lessons from Argentina

Mathew Bradbury and Matías Vernengo

Working Paper Series, Department of Economics, University of Utah from University of Utah, Department of Economics

Abstract: The paper sheds light on the apparent success of dollarization in Ecuador. The experience of Argentina with convertibility is used to anchor the analysis. Two key factors are seen to play the most important role; first, the behavior of the real exchange rate and second, the source of external resources. The papers explains that exogenous determinants of the real exchange rate- productivity growth, the value of the dollar, commodity prices- have tended to behave very differently over the respective life spans of the Argentine and Ecuadorian monetary regimes. Trends in these exogenous variables have favored positive trends in the Ecuadorian current account. However, as the paper shows, the critical element informing the sustainability of the currency remains the source of external funds. Whereas in Argentina the IMF and international capital flows were central in propping up the flawed regime, the fate of Ecuadorian experiment relies heavily on a surprising factor, remittances. Reliance on remittance income is seen as a stop gap that cannot secure sustainability of the monetary system and implies longer run consequences for lost development potential.

Keywords: Dollarization; Balance of Payments; Debt Sustainability (search for similar items in EconPapers)
JEL-codes: E52 F24 F31 O54 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2008
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:uta:papers:2008_12

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