Working Paper, University of Utah, Department of Economics 2008-12
The paper sheds light on the apparent success of dollarization in Ecuador. The experience of Argentina with convertibility is used to anchor the analysis. Two key factors are seen to play the most important role: first, the behavior of the real exchange rate and second, the source of external resources. The papers explains that exogenous determinants of the real exchange rate- productivity growth, the value of the dollar, commodity prices- have tended to behave very differently over the respective life spans of the Argentine and Ecuadorian monetary regimes. Trends in these exogenous variables have favored positive trends in the Ecuadorian current account. However, as the paper shows, the critical element informing the sustainability of the currency remains the source of external funds. Whereas in Argentina the IMF and international capital flows were central in propping up the flawed regime, the fate of Ecuadorian experiment relies heavily on a surprising factor, remittances. Reliance on remittance income is seen as a stop gap that cannot secure sustainability of the monetary system and implies longer run consequences for lost development potential.
Dollarization Balance of Payments Debt Sustainability