External shocks on a dollarized economy: an empirical evidence from Ecuador
| Autor | Elena Zambrano Córdova |
| Cargo | Economista de la Universidad Técnica Federico Santa María |
| Páginas | 111-142 |
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Abstract:
Theory suggests that countries within a dollarized regime will have problems
responding to external shocks, since these countries lack of monetary policy.
Empirical research on this issue is based mainly on the case of Panama, as the
country adopted dollarization in 1904. However, since 2000 Ecuador, a very
vulnerable economy to external disturbances through its dependence on oil exports
and personal remittances, adopted the regime as well.
In order to contribute to the empirical evidence about one disadvantage of the
dollarized regime, this work examines how changes in terms of trade and personal
and non-dollarized countries in the region. The aim is to test if whether external
shocks result in greater costs to the Ecuadorian economy.
have not led to major repercussions to Ecuador in comparison with the entire region.
Furthermore, within the dollarized countries, changes in terms of trade leads to
higher costs to Panama and El Salvador than to Ecuador. Furthermore, between
these two countries and, even the overall region, a “resource curse” seems to be
present.
Key words: external shocks, dollarization, terms of trade, resource curse
JEL CODE: E6, F4
EXTERNAL SHOCKS ON A DOLLARIZED ECONOMY: AN
EMPIRICAL EVIDENCE FROM ECUADOR
Elena Zambrano Córdova*
* -
cias Económicas y Empresariales por la Erasmus University of Rotterdam.
Elena Zambrano Córdova - Cuestiones Económicas Vol. 26, No. 2:2, 2016
112
I. INTRODUCTION
Exchange rate regimes play an important role in open macroeconomic
models. This is the case in the Mundell-Fleming model where “the behaviour of an
types of systems, not all of them allow the economies to react appropriately to
external shocks. According to the theory, the adjustment process in this kind of
setting will be more “costly”, in terms of growth, wages or unemployment, in the
For example, in the case of a demand shock that leads to a decrease in
negative impact on the economy. The fall in the exports will translate into a fall in
the demand for national currency; consequently it will turn out into the depreciation
of the exchange rate. This depreciation will help to increase the exports since now
the products become “cheaper” to the outside market and the exporter now receives
more domestic currency for every unit of foreign currency. Notwithstanding, in the
done through a reduction in wages and prices, or even an increase in unemployment.
case is dollarization. In this case a country gives up its national currency and adopts
dollarization”. There is also the case of “partial or de facto dollarization”, that is
when the country maintains its national currency, but transactions can also be made
in foreign currency, leading the country to a bi-currency system. (Quispe-Angoli and
Elena, 2006).
The current literature on the topic is more extensive in the case of partial
dollarization, since more countries maintain this regime. Research on full dollarization
is more limited and focus mainly on the experience of one single country: Panama.
The latter principally because the country adopted dollarization a long time ago
-since 1904- and is very important in terms of international trade due to its Canal.
Nevertheless, there is another dollarized country within the Latin-American
region that also deserves to be a subject of study, especially for to have more
empirical evidence on one of the disadvantages of the exchange rate system: the
regardless of not having as many years dollarized system as Panama, it is a more
representative economy in comparison to other independent countries that also use
External shocks on a dollarized economy: an empirical evidence from Ecuador
113
another nation´s currency1. Furthermore, an important reason is that the country
on one hand lacks of monetary and exchange rate policy as an instrument to adjust
the economy, but on the other hand, presents a strong dependence on revenues -oil
exports and personal remittances- highly vulnerable to external circumstances.
country gained some level of stability and economic progress: As illustrated in Figures
presented important improvements. But despite the latter, the country present, some
particular characteristics that combined with a dollarized system, can exacerbate the
fact of not having monetary policy to react to external shocks.
percent of its total exports and, on average, 30% of the total incomes of the state
budget during the past six years2. According to Acosta (2009), the importance is
such that a single reduction of one dollar in the price of the Ecuadorian oil barrel
dollars. Notwithstanding, the problem with this particular commodity is the volatility
of its price, especially in times of economic turmoil (see Figure #4 in Appendix).
the purchasing power of its exports, and hence the real level of income.
Second, it is a country with a large population of emigrants abroad3, therefore,
immigrants to their families that still live in the country (see Figure #5 in Appendix).
Several Ecuadorian economists such as Alberto Acosta, Rafael Correa4, Carlos
Larrea, among others, consider that remittances sent by the emigrants were one
helped to sustain dollarization. For an overview of the importance of the remittances
for the country, during 2007, which was the year with the highest peak of remittances
was registered, they represent about 6.5% of GDP, 10.2% of the households’
consumption and 59.9% of the non-oil exports (Banco Central del Ecuador, 2007).
1 Small city-states as Monaco, San Marino or Andorra.
central government budget. December 2014.
3 Herrera et al. (2005) reports that 837.062 Ecuadorians left the country during the period 1997-
2004 and have not returned.
4 Actual president of Ecuador.
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