External Shocks on a Dollarized Economy

Theory suggests that countries within a dollarized regime –known as super-fixed exchange rate- will have problems responding to external shocks since these countries lack of monetary policy. Empirical research about this kind of costs -and dollarization’s experience in general- is based mainly on the case of Panama, since the country adopted dollarization since 1904. However, since 2000 another Latin-American country, very vulnerable to external disturbances through its dependence on oil exports and personal remittances, adopted the regime as well: Ecuador. In order to contribute to the empirical evidence about one disadvantage of the dollarized regime, this thesis examines how changes in terms of trade and personal remittances affect the economy of Ecuador in comparison to the other dollarized and non-dollarized countries in the Latin-American region. The aim is to test if whether externals shocks result in greater costs –in terms of lower GDP per capita growth- to the Ecuadorian economy. Performing an EGLS panel model, the findings suggest that these externals shocks have not led to major repercussions to Ecuador in comparison with the entire region. Furthermore, within the dollarized countries, changes in terms of trade leads to higher costs on Panama and El Salvador than in Ecuador. Furthermore, between these two countries a “resource curse” seems to be present as improvements in terms of trade leads to a decrease in economic growth