BLOG: Three Gap Analysis of Macroeconomic Consistency: A Case Study of the Ecuadorian Economy

By Juan Andres Mesias, The George Washington University

This paper studies the macroeconomic consistency of the Ecuadorian economy from 2007- 2016. Initially, the paper develops a Three-Gap Model to carry out a basic consistency check on all three macroeconomic accounts, public, private and current accounts. Then, five simple linear regression models with time series are done in an attempt to analyze the impact variables such as private savings and investment, public consumption, investment and revenues, and exports and imports have on one another and how each affects the whole gross domestic product of Ecuador. The analysis is done with data sets obtained from the World Bank and the Ecuadorian Central Bank. Finally, the paper explores whether the economy experienced a crowding-out effect caused by an increase in government spending. The main conclusions obtained by this paper is that Ecuador has been experiencing a macroeconomic inconsistency fostered by an irresponsible government that spends more than it receives. The five regressions showed that the Real Effective Exchange Rate is not significant when determining growth in Ecuador while consumption is the biggest factor that can drive growth. Finally, it is proven that the economy crowded out and the private sector stopped being the biggest player and instead the public sector took over.

Read the full paper here.

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