Dollarization and Growth: An Application of the Synthetic Control Method to the Case of Ecuador

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