Assessment of the Transmission of U.S. Monetary Policy to Ecuador

The United States’ impact on the world economy is no secret. With one of the largest economies in the world, it is logical to assume that economic decisions, like monetary policy formation, made in the United States have effects on other countries’ economies. The question is by precisely what means do U.S. economic decisions affect other economies, and what is the magnitude of those effects. Furthermore, what, if any, role does the receiving country’s exchange rate regime play in the transmission of such monetary policy decisions? This paper constructs a vector autoregressive (VAR) model to analyze the interactions of U.S. monetary policy and domestic deposit interest rates, inflation rates, and GDP of Ecuador to test how U.S. monetary policy is transmitted to Ecuador. The VAR is estimated twice, once over the entire time period of 1992-2016 and once over the time period of 2000-2016 when Ecuador became fully dollarized. The coefficients of the estimated equations are analyzed, Granger Causality tests are conducted, and Impulse Response Functions are modeled. No transmission is found via GDP, but some evidence of transmission via the interest rate is shown. No difference is found in transmission based on time parameterization. Suggestions are made for future changes to the model