The Fiscal and Monetary History of Ecuador: 1950–2015

August 2018
Simón Cueva, Julían P. Díaz

We document the main patterns in Ecuador’s fiscal and monetary policy during the 1950–2015 period, and conduct a government’s budget constraint accounting exercise to quantify the sources of deficit financing. We find that, prior to the oil boom of the 1970s, the size of the government and its financing needs were small, and the economy exhibited high growth rates and low inflation. The oil boom led to a massive increase in government spending. The oil prices crash of the early 1980s was not accompanied by any substantial fiscal correction, and the government considerably relied on seigniorage as a source of revenue. This coincided with almost three decades of high inflation rates and stagnant output. The dollarization regime, implemented in 2000, removed the ability of the government to resort to seigniorage to cover its imbalances. Indeed, in spite of large deficits registered since 2007, inflation has remained at historically low levels. However, the recent policies of inflated spending—and the heavy borrowing needed to finance it—remind those that led to the collapse of the economy during the 1980s and 1990s, and generate concerns regarding the long-term sustainability of the dollarization regime, and of the benefits it has provided.

The working paper can be found here. 

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