Oil price shocks, government revenues and public investment: The case of Ecuador

Díaz-Kovalenko, Igor E. and Torres, José L. (2022): Oil price shocks, government revenues and public investment: The case of Ecuador.

Abstract

This paper studies the macroeconomic consequences of oil price shocks for small oil-exporting countries as a function of the adopted specific fiscal policy rule related to oil revenues. We focus on the particular case of Ecuador, where a large fraction of fiscal revenues depends on oil revenues, and where a fiscal policy rule implemented in 2008 establishes that public investment is a function of oil revenues. The paper develops a simple two-sector model featuring some key characteristics of the Ecuadorian economy to study the effects of international oil price shocks on macroeconomic volatility and welfare. The paper investigates alternative simple and easy practical implementation of oil revenues-related fiscal rules and compares their effects on economic activity and welfare to the existing one. We argue that a slight modification of the current fiscal rule, by linking public investment to all government revenues and not only to oil revenues, would significantly reduce the volatility of the Ecuadorian economy and cut down the welfare cost of oil price shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil exporting countries; Oil price shocks; Oil windfalls; Fiscal rules; Public investment.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q32 - Exhaustible Resources and Economic Development; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy

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