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Dollarization in practice and in a textbook

by Kurt Schuler January 10th, 2014 1:15 am

This week marks the 14th anniversary of dollarization in Ecuador. Unlike many other South American countries, Ecuador had experienced bouts of annual inflation in mid double digits but never a hyperinflation. In 1999-early 2000, a confluence of events that included a low world price for oil (Ecuador's main export), a fragile banking system distrusted by the public, a fractious political system, and a central bank that seemed unaware that its policies were at the root of inflation brought the country to the brink of hyperinflation. Ecuador's president then announced one evening that the country would replace its own currency with the U.S. dollar, and within a week signs of stabilization began to appear. Normally a 14th anniversary would not be especially noteworthy, but by my calculations, dollarization has now outlasted for durability any monetary arrangement that Ecuador has had since the 19th century. No rigid exchange rate and no variant of floating in the 20th century lasted as long.

Perhaps on the 15th anniversary I will say something of my involvement with suggesting dollarization in Ecuador some months before it came to pass, and of two Ecuadorians, Joyce de Ginatta and Dora de Ampuero, who mobilized substantial elements of the populace and the intellectuals, respectively, to make dollarization conceivable as a policy. For now, I will simply point out that among the naysayers about dollarization was Paul Krugman, who compared it to witchcraft, and move on to contrast dollarization in practice with dollarization in a textbook. The textbook is Carlos Végh's Open Economy Macroeconomics in Developing Countries. intended to be a graduate level textbook. An acquaintance kindly pointed out the book to me several months ago and showed me the long chapter on dollarization. I was astounded. There is page after page of equations, and nothing that I would ever use to talk to a president, prime minister, finance minister, or central bank governor (I have talked to some), let alone the man on the street. There isn't even anything I would ever use to talk to a Ph.D. economist if the focus was on possibly implementing it. A student reading the book would, I think, be ill equipped and maybe even unable to answer the fairly simple, practical questions that people want to know outside of a graduate school classroom.

Ecuador's last period of comparable durability to dollarization took place,  no surprise, under free banking. Ecuador's experience with free banking has not to my knowledge been summarized in English in an accessible article comparable to the one I cited a couple of posts ago on Peru. Material I have seen in Spanish considers free banking, but merely as one episode of Ecuador's longer monetary history, and the material is so old that it does not take account of the ideas about free banking pioneered by Larry White and George Selgin within the last 30 years. If there is writing that meets these criteria, though, please mention it in the comments.

2 Responses to “Dollarization in practice and in a textbook”

  1. avatar McKinney says:

    This is very interesting. Would love to read more about it.

  2. avatar Francisco Borja says:

    Professor Schuler,

    I am writing my graduate dissertation on that very subject ("did Ecuador have a free-banking, expirience?"), using original documents I have been able to gather from the central bank archive here in Ecuador, and of course, professors Selgin, White and Dowd's books on the subject as theoretical backbone.

    I would be very honored if I could send it to you for commentary once its finished.

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