Abstract
AbstractThis paper adopts a Markowitz inspired treatment of uncertainty in inflation and the exchange rate in analyzing the dollarization of Ecuador in 2000. The adoption of the U.S. dollar set a fixed price of foreign (and domestic) currency of one, with zero nominal return and zero variance. Dollarization thus stabilized inflation, guaranteed convertibility in foreign trade and resuscitated the stock exchange in Quito. The dollar served the role of the risk-free asset, save for the risk of U.S. inflation. However, in over 20 years, Ecuador has paid seigniorage to the U.S. Treasury of an accumulated $20 billion in outside money, dollar currency and coin. In 2023, we estimate an operational expense in terms of new seigniorage and the inflationary tax of slightly more than 1% of its GDP. Yet Ecuador has stabilized prices and grown more rapidly, coincidently, by 1.2%.
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