External Shocks, Fiscal Transmission Mechanisms, and Macroeconomic Volatility: Evidence from Ecuador

This paper investigates how external shocks propagate through fiscal transmission mechanisms in a commodity-dependent economy within a dynamic macroeconomic framework. The study contributes to the literature on macroeconomic fluctuations by examining the interaction between external revenue volatility, fiscal behavior, and institutional features in shaping short-run dynamics and medium-term outcomes. A Dynamic Stochastic General Equilibrium (DSGE) model is developed and calibrated to the Ecuadorian economy. The framework explicitly incorporates procyclical fiscal behavior, public capital accumulation, and endogenous spending efficiency, allowing for a structural analysis of fiscal transmission channels under external and productivity shocks. Counterfactual simulations are employed to assess the role of fiscal policy design and institutional constraints. The results show that while productivity shocks remain a key driver of output fluctuations, external revenue shocks significantly influence macroeconomic volatility through fiscal channels. Procyclical fiscal responses amplify fluctuations by reducing public investment and spending efficiency, slowing public capital accumulation and prolonging output contractions. Alternative fiscal configurations mitigate short-run volatility, although their effectiveness depends critically on institutional features governing spending efficiency. Overall, the analysis highlights that macroeconomic dynamics in resource-dependent economies are shaped not only by external shocks, but also by the interaction between fiscal policy design and institutional capacity. Integrating these elements into DSGE models provides a more comprehensive understanding of fiscal transmission mechanisms and macroeconomic volatility.