Oil price volatility, government spending and gdp in ecuador

Camacho Villagomez F.R.; Bajaña Villagomez Y.S.; Rodríguez Bustos A.J. · Revista Venezolana de Gerencia (2024) · DOI: 10.52080/rvgluz.29.108.3

Resumen

Ecuador became an oil exporting country in the early years of the 1970s. The main objective of this study is to estimate the effect of the volatility of the international price of oil on the level of public spending and GDP in Ecuador. To do this, a methodology consisting of three stages is used, based on data covering the period 2004-2019 on a quarterly basis. First, the oil price volatility variable is constructed from an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) econometric model. Next, a standard Vector Autoregressive (VAR) model in the fiscal policy literature is estimated, adding the previously constructed volatility variable. Finally, structural shocks are identified taking advantage of Ecuador’s status as a price-taker country in the international oil market, and the impulse-response functions are computed. The results show that oil price volatility has a positive effect on public spending, which implies that the government in power throughout the study period is not prudent when there are sudden variations in the oil price. The economy, measured by GDP, decreases in the face of shocks in volatility, supporting the hypothesis that volatility generates uncertainty in economic agents, and in this way, reduces the level of production. In other words, Ecuador is not only vulnerable to the effects of the oil price, but also to its volatility. A possible solution is the implementation of mechanisms that reduce the exposure of the economy to periods of oil volatility.

Instituciones: Pontificia Universidad Católica del Perú