Monetary shocks and demand in a dollarized small open economy: The case of Ecuador

The financial crisis Ecuador suffered in 1999 triggered the official dollarization of its economy which turned this country into the largest economy with the dollar as legal tender. This research uses a recursive Vector Autoregression and Bayesian Vector Autoregression model to examine the transmission of monetary shocks to private demand in the context of a dollarized small open economy analyzing the case of Ecuador. The empirical assessment of monetary shocks suggests the existence of an important relation of external monetary policies represented by the reer over the monetary base, deposits and consumption. Also, deposits are crucial to boost consumption rather than credit indicating the preference of households to consume through internal disposable resources. Additionally, the existence of liquidity puzzles under the two methodologies supported the suggestion of a special relationship between the response of the monetary price markets to monetary aggregates innovations as an aim of the financial system to capture resources due to the dollarization scheme.Master [60] en sciences économiques, orientation générale, Université catholique de Louvain, 201