The Evolution of External Shocks and Macrofiscal Outcomes in the Andes

The abundance of natural resources can adversely affect the macroeconomic stability of countries. Developing economic institutions that support the proper management of extractive industry resources is one of the fundamental factors for maintaining macroeconomic stability and generating long-term economic growth. This paper evaluates the impact of terms-of-trade shocks on fiscal performance and economic growth in the countries of the Andean region. To adequately capture the variation in both the magnitude of shocks and the sensitivity of economic and fiscal variables to those shocks, this paper makes use of a TV-SVAR model. This method allows us to evaluate whether the presence of fiscal institutions change their sensitivity to external disturbances. The results presented in this paper show a time-varying dynamic of both (1) terms-of-trade shocks and (2) the sensitivity of the Andean regions economies to such shocks, although with marked heterogeneity across countries. This heterogeneity coincides with the uneven development of the economic institutions in the countries of the region. The results highlight the importance of developing adequate economic policy frameworks in order to adequately mitigate the volatility in the terms-of-trade.