Dollarization's trade-off: tamed inflation, lost monetary flexibility

Dollarization delivered what two decades of sucre-era policy could not: Ecuador's annual inflation, which had run near 100% in 1999 and 2000, fell to single digits within a few years and has stayed low and stable ever since, because the country effectively imports the US Federal Reserve's price stability along with its currency. The cost showed up on the other side of the ledger. With no sucre left to devalue and no central bank able to set its own interest rate or act as a full lender of last resort, Ecuador lost the standard tools other oil-exporting economies use to cushion terms-of-trade shocks, leaving fiscal policy and labor-market adjustment to absorb pressure instead. Research examining Ecuador's experience has pointed to the 2015-16 oil-price slump and the 2020 pandemic shock as stress tests of this constraint, periods when, lacking a currency to depreciate, the burden fell on public spending cuts, bank liquidity, and a rise in external borrowing, including a 2020 default and restructuring of sovereign bonds. The Banco Central del Ecuador continued publishing monetary and reserve data throughout, but by design has not set an independent interest rate since 2000, a permanent structural feature of every chart of Ecuador's monetary indicators from that year onward.