Sovereign Risk and Dollarization: The Case of Ecuador
Through policy decision of governments and through other unofficial means, many countries have moved away from their local currency to seek protection against inflation provided by a hard currency, the dollar. Among the promises of dollarization is the reduction of sovereign risk associated with developing country debts and subsequently an increase in the rate of economic growth as the cost of financing economic growth declines. This however may not occur as the loss of the policy tool could lead to inflexibility as the economy is not able to respond to shocks, resulting in an increase in sovereign risk. This paper explores the effect of dollarization on sovereign risk in Ecuador and concludes that dollarization does not decrease sovereign risk.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, May 22, 2008, in Lisbon, Portugal.JEL Classification Codes: E44; F31; G19; O54 Keywords: Sovereign Risk; Dollarization; Ecuador
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