IMF Working Papers

Central Bank Balance Sheet Expansion in a Dollarized Economy: The Case of Ecuador

By Juan-Pablo Erraez, Julien Reynaud

December 2, 2022

Download PDF

Preview Citation

Format: Chicago

Juan-Pablo Erraez, and Julien Reynaud. Central Bank Balance Sheet Expansion in a Dollarized Economy: The Case of Ecuador, (USA: International Monetary Fund, 2022) accessed December 2, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

A textbook argument in favor of adopting another country’s legal tender is that it imposes strong constraints on money creation and therefore fiscal dominance. In Ecuador, an officially dollarized economy since January 2000, a series of accounting practices and subsequent changes in legislations approved over the period 2009-2014 allowed an expansion of the Central Bank of Ecuador’s (CBE) balance sheet to finance the central government. At its peak, central bank financing of the government represented 10 percent of GDP. This resulted in large liabilities to the CBE that translated into low reserve coverage, putting the public and private financial systems and ultimately the dollarization regime at risk. In this paper, we first present the legal and accounting processes behind the expansion of the CBE's balance sheet and some stylized facts. In the second section, we establish a stress test-like methodology to show how the expansion of the CBE’s balance sheet induced strong pressures on CBE’s liquidity. Ultimately, such liquidity stress at the CBE translated into high cash inflows needs, i.e. external debt, for the central government.

Keywords: Balance sheet expansion, Central bank, Fiscal dominance

Publication Details

  • Pages:

    23

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/234

  • Stock No:

    WPIEA2022234

  • ISBN:

    9798400226793

  • ISSN:

    1018-5941