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Dollarization and semi-dollarization in Ecuador

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  • Beckerman, Paul

Abstract

Over the 1980s and 1990s, GDP growth had stagnated because of oil export price volatility and natural disasters, the sacrifice of capital formation to heavy external public debt service, and incomplete and uneven structural reform. The exchange rate depreciation that proved continually necessary to sustain the net-export surplus and limit external debt accumulation induced Ecuadorians to dollarize spontaneously. The 1998 shocks affected real economic activity--hence bank loan portfolios, and widened the fiscal and current acccount deficits. The external imbalance led to exchange rate depreciation. Dollar-denominated bank loans whose borrowers lacked dollar income increasingly turned non-performing. At the same time, the depreciation swelled the locla currency value of dollar deposit liabilities. Many depositors, fearing that banks had become unsafe, withdrew, and over 1999 the Central Bank had to provide banks massive liquidity support. By year's end, the resulting monetary issue ledto the exchange rate collapse and incipient hyperinflation that forced the move to full dollarization. Ecuador's Central Bank will continue operating, using its foreign exchange holdings to carry out limited liquidity management and lender-of-last-resort activities. Ecuador's public accounts and banking system remain vulnerable to commodity-price and natural shocks. Exchange rate adjustment and monetary expansion are no longer available, however, to manage the external accounts, accommodate the public deficit, or assist failing banks. Further structural reform remains essential to assure fiscal discipline and banking system safety.

Suggested Citation

  • Beckerman, Paul, 2001. "Dollarization and semi-dollarization in Ecuador," Policy Research Working Paper Series 2643, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2643
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    References listed on IDEAS

    as
    1. Mr. Miguel A Savastano, 1996. "Dollarization in Latin America: Recent Evidence and Some Policy Issues," IMF Working Papers 1996/004, International Monetary Fund.
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    4. Eduardo Borensztein & Andrew Berg, 2000. "Full Dollarization; The Pros and Cons," IMF Economic Issues 24, International Monetary Fund.
    5. Mr. Guillermo Calvo & Mr. Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries: An Introduction," IMF Working Papers 1992/040, International Monetary Fund.
    6. Mr. Eduardo Borensztein & Mr. Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 2000/050, International Monetary Fund.
    7. Mr. Eduardo Borensztein & Mr. Andrew Berg, 2000. "Full Dollarization: The Pros and Cons," IMF Economic Issues 2000/004, International Monetary Fund.
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    Cited by:

    1. Alessandro Gobbi & Tim Willems, 2011. "Identifying US Monetary Policy Shocks through Sign Restrictions in Dollarized Countries," Tinbergen Institute Discussion Papers 11-145/2, Tinbergen Institute.
    2. Holland, Margaret B. & de Koning, Free & Morales, Manuel & Naughton-Treves, Lisa & Robinson, Brian E. & Suárez, Luis, 2014. "Complex Tenure and Deforestation: Implications for Conservation Incentives in the Ecuadorian Amazon," World Development, Elsevier, vol. 55(C), pages 21-36.
    3. Tim Willems, 2010. "What are the Effects of Monetary Policy Shocks? Evidence from Dollarized Countries," Tinbergen Institute Discussion Papers 10-099/2, Tinbergen Institute, revised 25 Mar 2013.
    4. Willems, Tim, 2013. "Analyzing the effects of US monetary policy shocks in dollarized countries," European Economic Review, Elsevier, vol. 61(C), pages 101-115.
    5. Tim Willems, 2011. "Using Dollarized Countries to Analyze the Effects of US Monetary Policy Shocks," 2011 Meeting Papers 200, Society for Economic Dynamics.
    6. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    7. Mabie, Alexander, 2016. "Prospects for a Currency Board in Iceland," Studies in Applied Economics 45, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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