Friday, December 11, 2009

What is Central Bank independence in a dollarized economy?

I must confess upfront that I find this story confusing. The president of Ecuador's allegedly independent Central Bank resigned under pressure yesterday because he didn't transfer a portion of the Central Bank's reserves to public sector banks quickly enough.

President Correa had ordered $2.4 billion to be transferred for use on spending programs to lower unemployment. The new Central Bank head is also the Economy Minister and a member of Correa's cabinet. 

At this point in the proceedings, one would usually be thinking, goodbye Central Bank independence, hello inflation.

But here is where it gets tricky. Ecuador is dollarized, right?  They don't have an exchange rate to defend. Does the Central Bank even need any international reserves? And how did it acquire them? Are these reserves somehow left over from the pre-dollarization days?

When Correa says "We are restructuring the Central Bank so that everyone understands that it has to follow the policies of our citizen's revolution" (todays WSJ p. A16), what does that mean? 

If a country is dollarized, do they even need a central bank, let alone an independent one? 

Isn't the Fed really Ecuador's central bank? 

OMG, is Correa restructuring the Fed? Is Chris Dodd Correa's puppet?


Yikes!

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