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The Limits to Dollarization in Ecuador: Lessons from Argentina

Author

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  • Mathew Bradbury
  • Matías Vernengo

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.

Suggested Citation

  • Mathew Bradbury & Matías Vernengo, 2008. "The Limits to Dollarization in Ecuador: Lessons from Argentina," Working Paper Series, Department of Economics, University of Utah 2008_12, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2008_12
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    File URL: http://economics.utah.edu/research/publications/2008_12.pdf
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    References listed on IDEAS

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    1. Lance Taylor, 1998. "Lax Public Sector, Destabilizing Private Sector: Origins of Capital Market Crises," SCEPA working paper series. 1998-11, Schwartz Center for Economic Policy Analysis (SCEPA), The New School, revised Oct 1998.
    2. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa67, February.
    3. Ken Jameson, 2008. "The Indigenous Movement and the Economic Trajectory of Ecuador," Working Paper Series, Department of Economics, University of Utah 2008_05, University of Utah, Department of Economics.
    4. Taylor, Lance (ed.), 2006. "External Liberalization in Asia, Post-Socialist Europe, and Brazil," OUP Catalogue, Oxford University Press, number 9780195189322.
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    Cited by:

    1. Mansell Wade & Openshaw Karen, 2009. "Suturing the Open Veins of Ecuador: Debt, Default and Democracy," The Law and Development Review, De Gruyter, vol. 2(1), pages 151-191, September.

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    More about this item

    Keywords

    Dollarization; Balance of Payments; Debt Sustainability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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