Document Type

Honors Paper

Advisor

Maria Cruz-Saco

Publication Date

2012

Abstract

This thesis examines the relationship between dollarization and banking stability in Ecuador. Through an econometric analysis I find that the main variables that affect banking stability in Ecuador are GDP, liquidity, financial efficiency, the proportion of productive assets, the percentage of past-due loans, the ratio between total assets and total liabilities, and the degree of concentration of the banking sector. All these variables have improved in the past decade thus strengthening banking stability. Furthermore, the four main effects of dollarization on a small, open, and developing economy include: i) the statistically significant decrease in inflation, ii) the removal of the figure of the lender of last resort, iii) the removal of currency risk, and iv) the increased credibility of regulatory institutions. These positive effects are proven to have a direct connection to independent variables, and thus on financial stability.

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The views expressed in this paper are solely those of the author.