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Looking for the twin deficits in a dollarized oil-exporting economy

Author

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  • Camacho-Villagómez, Freddy
  • García-Albán, Freddy

Abstract

We study the effects of fiscal policy shocks on the trade balance and the real exchange rate in a dollarized, oil-exporting economy. Using data from Ecuador, we estimate a Bayesian Vector Autoregression (BVAR) model that properly characterizes the role of oil revenues in the transmission of fiscal policy. We simulate policy scenarios and test the twin deficits hypothesis. We find that fiscal deficits driven by increases in government consumption or tax cuts weaken the trade balance, providing evidence for the twin deficits hypothesis under certain policy configurations. Positive oil revenue shocks also lead to a deterioration of the non-oil trade balance. The real exchange rate appreciates in response to both government consumption and investment shocks, while it depreciates following an oil revenue shock. Since government spending and oil revenues often move together in oil-exporting countries, the divergence in their effects raises important challenges for policymakers seeking to maintain external balance.

Suggested Citation

  • Camacho-Villagómez, Freddy & García-Albán, Freddy, 2026. "Looking for the twin deficits in a dollarized oil-exporting economy," Energy Economics, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:eneeco:v:160:y:2026:i:c:s0140988326003269
    DOI: 10.1016/j.eneco.2026.109447
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    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; State Space Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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