External shocks on a dollarized economy: an empirical evidence from Ecuador
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.