Effect of Official Dollarization on a Small Open Economy: Ecuador

32 Pages Posted: 8 Nov 2011

See all articles by Bedri Kamil Onur Tas

Bedri Kamil Onur Tas

TOBB University of Economics and Technology - Department of Economics; Economic Research Forum (ERF)

Selahattin Togay

Gazi University

Date Written: November 7, 2011


This paper investigates the effects of dollarization on the macroeconomic performance of a small open economy, Ecuador, using a time series perspective. More specifically, we investigate how dollarization effects inflation, GDP, inflation uncertainty and money-price relationship in Ecuador. There are four main findings of this study. First, inflation is lower after dollarization. Second, GDP growth is higher after dollarization when several other factors like rising oil prices and increase in the equity markets of emerging economies are controlled. Third, inflation uncertainty measured by inflation variance through GARCH is lower during dollarization. Finally, money supply is endogenous after dollarization and exogenous before dollarization. A new test is proposed and implemented to investigate endogeneity of money. As a result, we conclude that dollarization improved the macroeconomic performance of Ecuador and changed the money-price relationship in Ecuador. The results are robust to different arguments about the empirical methodology.

Keywords: Dollarization, Ecuador, inflation uncertainty, GARCH model, money-price relation, endogeneity

Suggested Citation

Tas, Bedri Kamil Onur and Togay, Selahattin, Effect of Official Dollarization on a Small Open Economy: Ecuador (November 7, 2011). Available at SSRN: https://ssrn.com/abstract=1955949 or http://dx.doi.org/10.2139/ssrn.1955949

Bedri Kamil Onur Tas (Contact Author)

TOBB University of Economics and Technology - Department of Economics ( email )

Sogutozu Cad. No:43 Sogutozu
Ankara, 06560

HOME PAGE: http://onurtas.weebly.com

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo

Selahattin Togay

Gazi University ( email )

Teknikokullar Ankara, 06500

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