Crowding-in or out effect of public investments in the Ecuadorian economy evidence from a vector autoregression model

Abstract

Ecuador is a middle-income country which has been growing during recent years in domains of economic, social, and environmental issues. The economic policy is based on the legislation of the Constitution of 2008, and the National Plan for Good Living. The public financial management of the country supports the dollarization, the fiscal and monetary policies, the government budget, public debt, and strategies to eradicate poverty. According to the National Plan for Good Living, the appropriate economic policy is Keynesianism, where the Ecuadorian public investment has been the key variable to achieve economic growth, due to it increases the economy’s aggregate demand and, through Keynesian fiscal multipliers, promotes short-term growth. The subject of this thesis is to analyze the relationship between aggregate public investment and private investment for the Ecuadorian economy, between 2000 - 2015. The analysis provides a review of theoretical findings of crowding out and crowding in effects which depend on public and private expenditure structures. The thesis relies on a Vector Autoregressive Model (VAR) model. The data collected has been the public and private investment, the GDP, direct and indirect taxes, and nominal interest rate. This thesis concludes that the government investment “crowds out” private investment, while private investment, “crowds in” public investment.