Relationship Between Fiscal and Trade Deficits in Ecuador During 2000-2022
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Abstract
This study examined the existence of twin deficits in Ecuador from the year 2000 to 2022. The objective was to empirically verify whether the relationship between the fiscal deficit and the trade deficit supports the twin deficits theory in a dollarized economy. The methodology employed was based on the application of Vector Autoregressive (VAR) models, using quarterly data from the Central Bank of Ecuador, the Ministry of Economy and Finance, and the European Central Bank. This approach allowed for the evaluation of the interaction and causality between fiscal and trade variables, providing a robust quantitative analysis. The results confirmed a significant correlation between the deficits, indicating that expansive fiscal policies foster trade deficits. In conclusion, the study corroborates the twin deficits hypothesis in Ecuador, highlighting the importance of integrating fiscal and trade policies to improve economic stability and long-term sustainability.
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