Dollarization in Ecuador and El Salvador

Abstract

This thesis examines the impact of dollarization in Ecuador and El Salvador. The variables studied are inflation, interest rate and GDP growth. We compare mean values and volatility before and after the implementation of the US dollar to analyze significant changes. Interest rates and inflation fell and stabilized in both countries after dollarization. The results regarding GDP growth are ambiguous which is explained by country specific factors. Furthermore, we analyze the impact of dollarization on trade by using a gravity regression model. Earlier empirical studies have shown equivocal results regarding the trade enhancing effect. Our findings provide no support of an increase in trade due to dollarization.