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Limiting fiscal procyclicality: Evidence from resource-dependent countries

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  • Coutinho, Leonor
  • Georgiou, Dimitrios
  • Heracleous, Maria
  • Michaelides, Alexander
  • Tsani, Stella

Abstract

We provide evidence that fiscal policy in resource-dependent countries is 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 in countries with stronger checks and balances on the executive. Operating a sovereign wealth fund can help limit fiscal policy procyclicality in some instances, while we find no such evidence for fiscal rules.

Suggested Citation

  • Coutinho, Leonor & Georgiou, Dimitrios & Heracleous, Maria & Michaelides, Alexander & Tsani, Stella, 2022. "Limiting fiscal procyclicality: Evidence from resource-dependent countries," Economic Modelling, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:ecmode:v:106:y:2022:i:c:s0264999321002893
    DOI: 10.1016/j.econmod.2021.105700
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    More about this item

    Keywords

    Fiscal procyclicality; Commodity prices; Natural resources; Sovereign wealth funds; Fiscal rules;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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