The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work

47 Pages Posted: 15 Feb 2006

See all articles by Luis I Jácome

Luis I Jácome

International Monetary Fund (IMF)

Date Written: January 2004

Abstract

This paper stresses three factors that amplified the 1990s financial crisis in Ecuador, namely institutional weaknesses, rigidities in public finances, and high financial dollarization. Institutional factors restricted the government`s ability to respond in a timely manner and efficiently enough to prevent the escalation of the banking crisis and spurred the adoption of suboptimal policy decisions. Public finance rigidities limited the government`s capacity to correct existing imbalances and the deteriorating fiscal stance associated with the costs of the financial crisis. Financial dollarization increasingly reduced the effectiveness of financial safety nets, fostered foreign currency demand, and accelerated a currency crisis, thereby further worsening the solvency of banks. These three factors reinforced each other, exacerbating costs as the economy went through a triple banking, currency, and fiscal crisis.

Keywords: banking crisis, institutions, fiscal policy, monetary policy, dollarization, blanket guarantee

JEL Classification: G21, G28, N46, O54

Suggested Citation

Jácome, Luis I, The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work (January 2004). IMF Working Paper No. 04/12, Available at SSRN: https://ssrn.com/abstract=878835

Luis I Jácome (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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