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Fiscal dynamics in a dollarized, oil-exporting country: Ecuador

  • María Lorena Marí Del Cristo

    ()

    (Economic Theory Department. Universitat de Barcelona)

  • Marta Gómez-Puig

    ()

    (Economic Theory Department. Universitat de Barcelona and Risk Center-IREA)

This 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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File URL: http://www.aeefi.com/RePEc/pdf/defi13-06.pdf
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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 13-06.

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Length: 29 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:aee:wpaper:1306
Contact details of provider: Web page: http://www.aeefi.com

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