Determinants of Inflation in a Dollarized Economy: The Case of Ecuador

Abstract

In this paper we estimate a structural VAR model to identify the causes of inflation in Ecuador. To examine the VAR dynamics, we use the decomposition of the variance because it provides information about the relative importance of each shock to the variables in the VAR. We differ from previous studies because we are able not only to identify the impact of each exogenous variable on the inflation rate but also to estimate the inflation rate from the exogenous variables in the model. We found that on the first quarter of 2008 the annual inflation rate in Ecuador was mainly caused by international prices, exchange rates and public policy.VAR, SVAR, Inflation, Time Series