Should Ecuador abandon the U.S. dollar (analysis)

Pass-through in dollarized countries: should Ecuador abandon the US dollar?

María Lorena Marí Del Cristo and Marta Gómez-Puig
Economic Theory Department, University of Barcelona, Barcelona 08034, Spain
In this article, we examine the convenience of dollarization for Ecuador today. As
Ecuador is strongly integrated
financially and commercially with the United States,
the exchange ratE pass-through should be zero.However,we sustain that rising rates
of imports from trade partners other than the United States and subsequent real
effective exchange rate depreciations are causing the pass-through to move away
from zero.Here,in the framework o fthe Vector Error Correction Model,we analyze
the impulse response function and variance decomposition of the inflation variable.

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We show that the developing economy of Ecuador is importing inflation from its
main trading partners, most of them emerging countries with appreciated curren-
cies. We argue that if Ecuador recovered both its monetary and exchange rate
instruments, it would be able to fight against inflation. We believe such an analysis
could be extended to other countries with pegged exchange rate regimes. Read Article – PDF