Dollarization and Growth: An Application of the Synthetic Control Method to the Case of Ecuador
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Abstract
The debate on the potential impact of full dollarization for promoting economic growth has been controversial and based on limited empirical analysis. This work scrutinizes the impact of dollarization on real per capita GDP in Ecuador's experience. We apply a Synthetic Control Method, a transparent and data-driven statistical technique, aiming to construct an artificial control group and a plausible counterfactual against which impacts from dollarization could be evaluated as part of the historical record. We found that after the decision to officially dollarize was made in 2000, per capita GDP in Ecuador increased on average about 9.69 percentage points relative to the synthetic control country. Furthermore, this gap appears to show an inverted U-shape over time, which would indicate that the effects of dollarization on economic activity are very powerful at the beginning but fade out over time.
JEL Codes: F31, F45, E42
Keywords: Dollarization; Synthetic Control Method; Per capita GDP; Ecuador
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Vera, L. and Pérez, B. (2025) “Dollarization and Growth: An Application of the Synthetic Control Method to the Case of Ecuador”, World Journal of Applied Economics, 11(1), pp. 17-37. doi: 10.22440/wjae.11.1.2.
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References
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De la Torre, A., Garca-Saltos, R., & Mascaro, Y. (2021). Banking, Currency, and Debt Meltdown: Ecuador Crisis in the Late 1990s (Documents). Yale School of Management. https://elischolar.library.yale.edu/ypfs-documents/14916.
Dornbusch, R. (2001). Fewer Monies, Better Monies. American Economic Review, 91 (2), 238-242. doi:10.1257/aer.91.2.238
Drehmann, M., & Juselius, M. (2014). Evaluating early warning indicators of banking crises: Satisfying policy requirements. International Journal of Forecasting, 30 (3), 759–780. doi:10.1016/j.ijforecast.2013.10.002
Edwards, S. (2001). Dollarization: Myths and Realities. Journal of Policy Modeling, 23 (3), 249-265. doi:10.1016/S0161-8938(01)00045-X
Edwards, S., & Magendzo, I. (2006). Strict Dollarization and Economic Performance: An Empirical Investigation. Journal of Money, Credit and Banking, 38 (1), 269-282.
Frankel, J., & Rose, A. (2020). Estimating the Effect of Currency Unions on Trade and Output (Working Papers, No. 7857). National Bureau of Economic Research (NBER). doi:10.3386/w7857
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King, G., & Nielsen, R. (2019). Why propensity scores should not be used for matching. Political Analysis, 27 (4), 435–454. doi:10.1017/pan.2019.11
Korab, P., Fidrmuc, J., & Dibooglu, S. (2023). Growth and inflation tradeoffs of dollarization: Meta-analysis evidence. Journal of International Money and Finance, 137 , 102915. doi:10.1016/j.jimonfin.2023.102915
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Rose, A. K., & van Wincoop, E. (2001). National Money as a Barrier to International Trade: The Case for Currency Union. American Economic Review, 91 (2), 386-390. doi:10.1257/aer.91.2.386
Sachs, J., & Larrain, F. (1999). Why Dollarization Is More Straitjacket Than Salvation. Foreign Policy, 116 , 80-92. doi:10.2307/1149645
Salvatore, D., Dean, J., & Willett, T. (2003). The Dollarization Debate. Oxford University Press, New York.
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Yeyati, E. L., & Sturzenegger, F. (2003). Dollarization: Debates and Policy Alternatives. MIT Press, Cambridge. doi:10.7551/mitpress/2481.001.0001
Abadie, A., Diamond, A., & Hainmueller, J. (2015). Comparative Politics and the Synthetic Control Method. American Journal of Political Science, 59 (2), 495-510. doi:10.1111/ajps.12116
Abadie, A., & Gardeazabal, J. (2003). The Economic Costs of Conflict: A Case Study of the Basque Country. American Economic Review, 93 (1), 113-132. doi:10.1257/000282803321455188
Alesina, A., & Barro, R. (2001). Dollarization. American Economic Review, 90 (2), 381-385. doi:10.1257/aer.91.2.381
Bajrami, F. (2023). The impact of dollarisation on economic growth, investment, and trade (Working Paper, No. 27/2023). Charles University in Prague, Institute of Economic Studies (IES). https://ies.fsv.cuni.cz/sites/default/files/uploads/files/wp_2023_27_bajrami.pdf.
Becker, M., & Kloßner, S. (2016). Computing generalized synthetic controls with r package MSCMT (Note,). Saarland University, Germany. https://www.lehrstab-statistik.de/download/papers/MSCMT_R.pdf.
Beckerman, P. (2001). Dollarization and Semi-Dollarization in Ecuador (Policy Research Working Paper, No. 2643). World Bank. https://documents1.worldbank.org/curated/en/940971468746637984/pdf/multi0page.pdf.
Beckerman, P. (2002). Longer-Term Origins of Ecuador’s “Predollarization” Crisis. In P. Beckerman & A. Solimano (Eds.), Crisis and Dollarization in Ecuador (p. 17-80). World Bank. https://econpapers.repec.org/scripts/redir.pf?u=https%3A%2F%2Fopenknowledge.worldbank.org%2Fbitstreams%2Fc1d96198-b829-5aa0-8f1f-bac08dd2ff6a%2Fdownload;h=repec:wbk:wbpubs:14256.
Beckerman, P., & Solimano, A. (2002). Crisis and Dollarization in Ecuador. World Bank. https://econpapers.repec.org/scripts/redir.pf?u=https%3A%2F%2Fopenknowledge.worldbank.org%2Fbitstreams%2Fc1d96198-b829-5aa0-8f1f-bac08dd2ff6a%2Fdownload;h=repec:wbk:wbpubs:14256.
Berg, A., & Borensztein, E. (2003). The Pros and Cons of Full Dollarization. In D. Salvatore, J. Dean, & T. Willett (Eds.), The Dollarization Debate (p. 73-101). Oxford University Press. doi:10.1093/0195155351.003.0004
Bonilla-Bolanos, A., & Villacreses, D. (2023). Full dollarization versus monetary union: The case of Ecuador. CEPAL Review, 140 , 107-125. https://repositorio.cepal.org/server/api/core/bitstreams/63a171de-9cae-4108-8483-9a193f5d5802/content.
Borio, C., & Drehmann, M. (2009). Assessing the risk of banking crises- revisited. BIS Quarterly Review, March, 29-46. https://www.bis.org/publ/qtrpdf/r_qt0903e.htm.
Cachanosky, N., Ocampo, E., Hernandez, K., & Ramseur, J. (2024). Did dollarization help Ecuador? Scottish Journal of Political Economy, 72 (1), e12397. doi:10.1111/sjpe.12397
Cachanosky, N., & Ramseur, J. (2020). 20 Years of Dollarization in Ecuador: Discussion and a Synthetic Control Analysis (Working Paper,). Department of Economics, Metropolitan State University of Denver.
Cajas, J., Estrella, H. J., & Almeida, B. P. (2022). Mercado Laboral y Shocks Petroleros: un an´alisis de cohorte y PVAR para Ecuador. Cuadernos de Econom´ıa, 41 (86), 243-276. doi:10.15446/cuad.econ.v41n86.86027
Calvo, G., & Reinhart, C. (2001). Reflections on Dollarization. In A. Alesina & R. Barro (Eds.), Currency Unions (p. 39-47). Hoover Institute Press. https://www.hoover.org/sites/default/files/uploads/documents/0817928421_39.pdf.
Carrillo-Maldonado, P., & Diaz Cassou, J. (2023). An anatomy of external shocks in the Andean region. The Journal of Economic Asymmetries, 27 , 1-25. doi:10.1016/j.jeca.2023.e00295
Casiraghi, M., Habermeier, K., & Harjes, T. (2022). Choice of Exchange Rate Arrangement (Monetary and Capital Markets Department: Technical Assistance Handbook). IMF. https://www.imf.org/en/Publications/miscellaneous-publications/Issues/2022/01/18/monetary-and-capital-markets-department-technical-assistance-handbook.
Cepeda, C., Zurita, E., & Ayaviri, D. (2016). Los Ingresos Petroleros y el Crecimiento Economico en Ecuador (2000-2015). Revista de Investigaciones Altoandinas, 18 (4), 459-466. doi:10.18271/ria.2016.238
Cueva, S., & Diaz, J. (2019). The Monetary and Fiscal History of Ecuador, 1960-2017 (Working Paper). Becker Friedman Institute for Economics at the University of Chicago. https://mafhola.uchicago.edu/wp-content/uploads/Ecuador_Cueva_Diaz.pdf.
De la Torre, A., Garca-Saltos, R., & Mascaro, Y. (2021). Banking, Currency, and Debt Meltdown: Ecuador Crisis in the Late 1990s (Documents). Yale School of Management. https://elischolar.library.yale.edu/ypfs-documents/14916.
Dornbusch, R. (2001). Fewer Monies, Better Monies. American Economic Review, 91 (2), 238-242. doi:10.1257/aer.91.2.238
Drehmann, M., & Juselius, M. (2014). Evaluating early warning indicators of banking crises: Satisfying policy requirements. International Journal of Forecasting, 30 (3), 759–780. doi:10.1016/j.ijforecast.2013.10.002
Edwards, S. (2001). Dollarization: Myths and Realities. Journal of Policy Modeling, 23 (3), 249-265. doi:10.1016/S0161-8938(01)00045-X
Edwards, S., & Magendzo, I. (2006). Strict Dollarization and Economic Performance: An Empirical Investigation. Journal of Money, Credit and Banking, 38 (1), 269-282.
Frankel, J., & Rose, A. (2020). Estimating the Effect of Currency Unions on Trade and Output (Working Papers, No. 7857). National Bureau of Economic Research (NBER). doi:10.3386/w7857
Frankel, J., Schmukler, S., & Serven, L. (2020). Verifiability and the Vanishing Intermediate Exchange Rate Regime (Working Papers, No. 7901). National Bureau of Economic Research (NBER). doi:10.3386/w7901
Hallren, R. (2014). Estimating the Effect of Currency Unions on Trade and Output (Working Papers, No. 7857). University of Oklahoma, Department of Economics. doi:10.2139/ssrn.2486253
Intercontinential Exchange. (2015). U.S. Dollar Index Contracts. https://www.ice.com/publicdocs/futures us/ICE_Dollar_Index_FAQ.pdf.
King, G., & Nielsen, R. (2019). Why propensity scores should not be used for matching. Political Analysis, 27 (4), 435–454. doi:10.1017/pan.2019.11
Korab, P., Fidrmuc, J., & Dibooglu, S. (2023). Growth and inflation tradeoffs of dollarization: Meta-analysis evidence. Journal of International Money and Finance, 137 , 102915. doi:10.1016/j.jimonfin.2023.102915
Larrea, C. (1996). Structural Adjustment, Income Distribution and Employment in Ecuador (Discussion Papers, No. FC1996-6). Center for International Studies, University of Toronto. https://idl-bnc-idrc.dspacedirect.org/server/api/core/bitstreams/52cdae49-941f-4291-8e14-c0d013e6228a/content.
Loayza, N., Fajnzylber, P., & Calderon, C. (2005). Economic Growth in Latin America and the Caribbean: Stylized Facts, Explanations, and Forecasts (Report, No. 32180). World Bank. http://documents.worldbank.org/curated/en/647081468044960784.
Mahuad, J. (2021). Asi Dolarizamos al Ecuador: Memorias de un acierto historico en America Latina. Editorial Planeta.
Naranjo, M. (2018). Incidencia de la Dolarizaci´on sobre la Economia Ecuatoriana, 2000–2015. Semestre Economico, 21 (46), 95-122. doi:10.22395/seec.v21n46a4
Palley, T. (2003). The Economics of Exchange Rates and the Dollarization Debate: The Case against Extremes. International Journal of Political Economy, 33 (1), 61-82. doi:10.1080/08911916.2003.11042894
Penn World Table. (2019). Database v10.01. https://www.rug.nl/ggdc/productivity/pwt/?lang=en.
Rose, A. K., & van Wincoop, E. (2001). National Money as a Barrier to International Trade: The Case for Currency Union. American Economic Review, 91 (2), 386-390. doi:10.1257/aer.91.2.386
Sachs, J., & Larrain, F. (1999). Why Dollarization Is More Straitjacket Than Salvation. Foreign Policy, 116 , 80-92. doi:10.2307/1149645
Salvatore, D., Dean, J., & Willett, T. (2003). The Dollarization Debate. Oxford University Press, New York.
The Conference Board. (2024). Total Economy Database. https://www.conference-board.org/topics/total-economy-database#Data.
World Bank. (2024). World Development Indicators Database. https://databank.worldbank.org/source/world-development-indicators.
Yeyati, E. L., & Sturzenegger, F. (2003). Dollarization: Debates and Policy Alternatives. MIT Press, Cambridge. doi:10.7551/mitpress/2481.001.0001