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The Late 1990's Financial Crisis in Ecuador; Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization At Work

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  • Luis Ignacio Jácome

Abstract

This paper stresses three factors that amplified the 1990s financial crisis in Ecuador, namely institutional weaknesses, rigidities in public finances, and high financial dollarization. Institutional factors restricted the government's ability to respond in a timely manner and efficiently enough to prevent the escalation of the banking crisis and spurred the adoption of suboptimal policy decisions. Public finance rigidities limited the government's capacity to correct existing imbalances and the deteriorating fiscal stance associated with the costs of the financial crisis. Financial dollarization increasingly reduced the effectiveness of financial safety nets, fostered foreign currency demand, and accelerated a currency crisis, thereby further worsening the solvency of banks. These three factors reinforced each other, exacerbating costs as the economy went through a triple banking, currency, and fiscal crisis.

Suggested Citation

  • Luis Ignacio Jácome, 2004. "The Late 1990's Financial Crisis in Ecuador; Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization At Work," IMF Working Papers 04/12, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/12
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    Cited by:

    1. Bertoli, S. & Fernández-Huertas Moraga, J. & Ortega, F., 2013. "Crossing the border: Self-selection, earnings and individual migration decisions," Journal of Development Economics, Elsevier, vol. 101(C), pages 75-91.
    2. María Lorena Marí Del Cristo & Marta Gómez-Puig, 2013. "Pass-through in dollarized countries: should Ecuador abandon the US dollar?," Applied Economics, Taylor & Francis Journals, vol. 45(31), pages 4395-4411, November.
    3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
    4. Carlos Díaz Alvarado & Alejandro Izquierdo & Ugo Panizza, 2004. "Fiscal Sustainability in Emerging Market Countries with an Application to Ecuador," Research Department Publications 4371, Inter-American Development Bank, Research Department.
    5. Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, pages 1220-1248.
    6. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts," 2005 Meeting Papers 18, Society for Economic Dynamics.
    7. Carlos Díaz Alvarado & Alejandro Izquierdo & Ugo Panizza, 2004. "Viabilidad fiscal en países de mercados emergentes con un enfoque en Ecuador," Research Department Publications 4372, Inter-American Development Bank, Research Department.
    8. Kauffman, Craig M., 2014. "Financing watershed conservation: Lessons from Ecuador's evolving water trust funds," Agricultural Water Management, Elsevier, vol. 145(C), pages 39-49.
    9. Elena-Ivona Dumitrescu & Bertrand Candelon & Christophe Hurlin & Franz C. Palm, 2012. "Multivariate Dynamic Probit Models: An Application to Financial Crises Mutation," Working Papers halshs-00630036, HAL.
    10. Adam, Antonis & Karanatsis, Konstas, 2016. "Sovereign Defaults and Political Regime Transitions," MPRA Paper 69062, University Library of Munich, Germany.

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    Keywords

    Blanket guarantee; Banking crisis; Dollarization; Ecuador; Fiscal policy; Financial crisis; Monetary policy; institutions; banking; banking crises; banking system; Financial Institutions and Services: Government Policy and Regulation;

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