Good policy or good luck? Analyzing the effects of fiscal policy and oil revenue shocks in Ecuador

Abstract

This paper proposes a framework to estimate the effects of exogenous fiscal policy and oil revenue shocks on the macroeconomic activity of price-taking oil producers. We use a structural vector autoregressive model estimated with Bayesian methods and apply it to the Ecuadorian economy. Specifically, we investigate the effects of unanticipated changes in taxes, government consumption spending, government investment spending, and oil revenues on economic activity. The results show that unanticipated expansive fiscal policy either through taxes or government investment can have positive effects on output. However, contrary to most studies in the literature, consumption spending shocks do not significantly affect gross domestic product. We also find that oil revenue shocks influence all the variables in the model, evidencing the vulnerability of the Ecuadorian economy to fluctuations of oil revenues. Historically, oil revenue shocks have been the most important driving force to move output above or below trend.