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“Pass-through in dollarized countries: should Ecuador abandon the U.S. Dollar?”

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  • María Lorena Marí del Cristo

    ()
    (Faculty of Economics, University of Barcelona)

  • Marta Gómez-Puig

    ()
    (Faculty of Economics, University of Barcelona)

Abstract

In this article we examine the convenience of dollarization for Ecuador today. As Ecuador is strongly integrated financially and commercially with the United States, the exchange rate pass-through should be zero. However, we sustain that rising rates of imports from trade partners other than the United States and subsequent real effective exchange rate depreciations are causing the pass-through to move away from zero. Here, in the framework of the Vector Error Correction Model, we analyse the impulse response function and variance decomposition of the inflation variable. We show that the developing economy of Ecuador is importing inflation from its main trading partners, most of them emerging countries with appreciated currencies. We argue that if Ecuador recovered both its monetary and exchange rate instruments it would be able to fight against inflation. We believe such an analysis could be extended to other countries with pegged exchange rate regimes.

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Bibliographic Info

Paper provided by University of Barcelona, Research Institute of Applied Economics in its series IREA Working Papers with number 201216.

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Length: 40 pages
Date of creation: Oct 2012
Date of revision: Oct 2012
Handle: RePEc:ira:wpaper:201216

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Postal: Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona
Web page: http://www.ub.edu/irea/
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Keywords: Pass-through; shocks; dollarized countries; structural VECM JEL classification: E31; F31; F41;

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