An Estimation of Ecuador’s Export Demand Function with the US

Abstract

This paper employs the bounds testing approach to cointegration to estimate Ecuador’s export demand function with the US between 1965 and 2011 with special emphasis on dollarization’s impact on exports. We develop two different export demand models based on previous empirical studies of this nature. Model I defines real exports as a function of the US real GDP, relative prices, exchange rate volatility, and dollarization. Model II relates real exports to US real GDP, real exchange rate, volatility, and dollarization. Results confirm a unique cointegration relationship between exports and its regressors in Models I & II. In the long run, in both models, GDP is positive and elastic, while volatility is positive and inelastic. Relative prices in Model I and real exchange rate in Model II are not statistically significant. Both models reveal that dollarization has had a significant, but negative and inelastic long-run and short-run impact on Ecuador’s exports to the US. Further, Model I seems to be superior to Model II in terms of the strength of cointegration, long-run and short-run elasticities, adjusted R2, and in satisfying diagnostic tests.

Keywords: Ecuador, Export Demand, Dollarization, Elasticity, Cointegration

JEL Classification: F14, F31