On the compensation principle and the central bank under dollarization

Abstract

The article examines the role the Central Bank of a country should play in a dollarization process, using the case of Ecuador in 2000 as a reference. In that year, Ecuador dollarized its economy without adequate planning to handle the economic change. It explores how the loss of authority of the Central Bank, by losing its ability to issue currency, affected its role in the country's monetary policy. The analysis is based on three main sources: the theoretical framework, opinion studies on dollarization in Ecuador, and current economic data from the country. It is shown that since dollarization, Ecuador's Gross Domestic Product (GDP) growth has not been sustained, which is directly related to the dysfunction of the Central Bank. It is argued that dollarization in Ecuador was not fully exploited to build a solid economic model. It is noted that the lack of adequate compensation for those affected by dollarization has led to long-term negative effects, including job losses and increased poverty. The article highlights that the Central Bank of a dollarized country must play a crucial role in sustainable economic development. This involves acquiring in-depth knowledge of dollarization, analyzing its results, and designing long-term compensation plans. However, the Central Bank of Ecuador has not fulfilled these functions adequately, contributing to the negative effects of the dollarization process. In summary, the article concludes that the Central Bank of a dollarized country must adjust its role to effectively manage the social and economic impacts of dollarization. In the case of Ecuador, it is pointed out that the Central Bank has not met these expectations, exacerbating the country's economic problems since dollarization.
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Keywords

Dollarization, Central Bank, Monetary policy, Compensation, Social impact

References

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7. Policonomics. (s.f.). Criterio de compensación. Recuperado de: https://policonomics.com/es/criterio-compensacion/.

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