How does being a dollarized economy aﬀect a country in times of a crisis? Evidence from Ecuador

Bergevin-Chammah, Carine; Domenech, Maria del Mar; Guasch Salvadó, Marta; Murillo, Ricard; Ripoll, Rosa

How does being a dollarized economy aﬀect a country in times of a crisis? Evidence from Ecuador

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Bergevin-Chammah, C, Domenech, M, Guasch Salvadó, M, Murillo, R, Ripoll, R. How does being a dollarized economy aﬀect a country in times of a crisis? Evidence from Ecuador. 2017. handle: http://hdl.handle.net/10230/33465

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Abstract

This paper analyses how a dollarized country is aﬀected by a ﬁnancial crisis, since a diﬀerent response is expected due to the lack of independent monetary policy. The study focuses on the case of the dollarized economy of Ecuador during the 2008 U.S. dollar appreciation amid the ﬁnancial crisis. In order to assess whether Ecuador had a diﬀerent response to the crisis compared to its non-dollarized counter-factual, a Synthetic Control Method is implemented. Fur-thermore, a Structural Vector Autoregression (SVAR) method is used to study the response of the main macroeconomic variables to a nominal appreciation through a Structural Impulse-response Function (SIRF), comparing it to the response to a nominal depreciation in the case of Colombia. The results show that the behavior of Ecuador during the crisis diverges substantially from the response of similar economies. The results in the case of Colombia are in accordance with the IS-LM model, whilst for the case of Ecuador the nominal rigidities prevent prices to adjust immediately, provoking short term ﬂuctuations in real variables. Finally, some policy recommendations are proposed.