ANALYSIS OF THE POLITICAL BUSINESS-CYCLE THROUGH DSGE MODELS, THE CASE OF ECUADOR

Abstract

This investigation aims to analyze the impact of political instability on economic activity in Ecuador during the 2000–2023 period, within the framework of a dollarized economy. To this end, two dynamic stochastic general equilibrium (DSGE) models are developed: a neoclassical (RBC) model and a New Keynesian (NK) model, both calibrated to replicate Ecuador’s main macroeconomic aggregates.

The study explicitly incorporates a political transmission channel through a stochastic shock that affects total factor productivity and public investment execution. Both models are used to generate counterfactual simulations, enabling an evaluation of key variables such as non-oil GDP, public capital, and aggregate consumption under different institutional stability scenarios. From a historical-economic perspective, the model’s results are contextualized using key events in Ecuador’s recent history, such as the 2005 political crisis, the fiscal reforms between 2007 and 2016, and the social and health crisis of 2020.

The conclusion is that political instability significantly undermines the effectiveness of public expenditure as a macroeconomic stabilizer, particularly in settings characterized by procyclical fiscal rules and limited monetary autonomy. Furthermore, the New Keynesian framework proves to be a more suitable tool for analyzing fiscal policy in Latin America, especially in environments marked by institutional rigidities and nominal frictions.