Good Luck or Good Policy? An Analysis of the Effects of Oil Revenue and Fiscal Policy Shocks: The Case of Ecuador

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 apply the methodology to Ecuador, using a structural vector autoregressive model estimated with Bayesian methods. Specifically, we investigate the effectiveness of taxes, government consumption spending, government investment spending, and oil revenues on economic activity. The results show that expansive fiscal policy either through taxes or government investment has positive effects on output. However, contrary to most studies in the literature, consumption spending does not seem to have a significant effect. We also find that oil revenue shocks are a key transmission channel that significantly affects all the variables in the model, evidencing the vulnerability of the Ecuadorian economy to fluctuations of oil revenues. In particular, oil revenue shocks have been the most important driving force to move output above or below trend historically.