Working Paper: CEPR ID: DP9672
Authors: Leonor Coutinho; Dimitrios Georgiou; Maria Heracleous; Alexander Michaelides; Stella Tsani
Abstract: We provide evidence that fiscal policy in resource-rich countries is strongly procyclical. The empirical analysis reveals that on average real government consumption in these countries tends to significantly rise (fall) in good (bad) times. To control for endogeneity we use an instrumental variable for GDP growth that arises naturally, namely the growth in commodity prices of the main natural resource export. We also find that fiscal policy procyclicality is lower in more democratic regimes, and that operating a sovereign wealth fund is more successful in limiting fiscal policy procyclicality than introducing fiscal rules.
Keywords: Commodity Prices; Fiscal Procyclicality; Fiscal Rules; Natural Resources; Sovereign Wealth Funds
JEL Codes: E62; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| democratic institutions (P16) | fiscal procyclicality (E62) |
| checks and balances (D72) | fiscal procyclicality (E62) |
| fiscal rules (E62) | fiscal procyclicality (E62) |
| sovereign wealth funds (G23) | fiscal procyclicality (E62) |
| GDP growth (O49) | real government consumption growth (E20) |
| growth in commodity prices (Q02) | GDP growth (O49) |