Fiscal dynamics in a dollarized, oil-exporting country: Ecuador
AbstractThis paper examines the relationship between fiscal variables and economic activity in Ecuador. We use a macro-level dataset covering twelve years of full dollarization to explore the link between government spending, oil revenues, non-oil tax revenues and the economic activity index. The cointegrated VAR approach is adopted to identify the permanent and transitory shocks that affect both fiscal and macroeconomic variables. We identify two forces that push the fiscal system out of equilibrium: namely, economic activity and fiscal spending. The tax revenues variable is purely adjusting, consistent with the tax smoothing theory (Barro, 1979), but risking fiscal discipline. In a dollarized country, since there is no possibility of earning the “inflation tax” or printing new money, taxes should not be the adjusting forces, but the pushing ones. Our results suggest that Ecuador should recover control of its monetary policy to enable and promote both economic and tax diversification in order to find a substitute for oil exports, the main source of government revenues.
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Bibliographic InfoPaper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 13-06.
Length: 29 pages
Date of creation: Sep 2013
Date of revision:
Cointegrated VAR; fiscal sustainability; fiscal shocks; debt; Ecuador;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-MAC-2013-10-18 (Macroeconomics)
- NEP-PBE-2013-10-18 (Public Economics)
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