Full Dollarization versus Monetary Union : A look at the Ecuadorian Case

This study proposes to use the OCAs Theory as theoretical basis to analyze the Ecuadorian Full Dollarization by understanding the Ecuador-United States (US) duo as an "Informal Monetary Union". At least two phenomena are of interest: (i) to study the degree of synchronization of the main Ecuadorian and US macroeconomic aggregates, and (ii) to understand how vulnerable the Ecuadorian economy is to US economic policy changes. To do so, econometric tools are implemented. While unit roots and stationarity tests are used for studying inflation rate synchronization and convergence, Structural Vector Autoregression Models are used for understanding Ecuadorian economy’s vulnerability of US economic policy changes. We find evidence about the fact that inflation synchronization indeed happened ex-post the Ecuadorian FD (or IMU) adoption, and consequently, monetary policy changes of US do affect Ecuadorian macro-variables patterns. Moreover, we argue that OCA Theory is indeed a very useful framework to study FD regimes