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Was This Time Different?: Fiscal Policy in Commodity Republics

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  • Luis Felipe Céspedes
  • Andrés Velasco

Abstract

According to standard economic theory, fiscal policy should be countercyclical. In the neoclassical smoothing model of Barro (1979), a government should optimally run surpluses in good times and deficits in bad times. That is the same a government should do, though for different reasons, in the standard Keynesian or neo-Keynesian framework. Yet in practice governments often seem to follow a pro-cyclical fiscal policy. Cuddington (1989), Talvi and Vegh (2005) and Sinnott (2009), among others, document that governments save little or even disave in booms. Procyclicality is most evident in Latin America (Gavin et al (1996), Gavin and Perotti (1997), Stein et al (1999)) but is also present in OECD countries (Talvi and Vegh (2005), Arreaza et al (1999), Lane (2003)).

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 365.

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Length: 49 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:bis:biswps:365

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Keywords: commodity prices; optimal fiscal policy; fiscal behavior; institutions;

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References

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  1. Tornell, Aaron & Velasco, Andres, 1995. "Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-06, C.V. Starr Center for Applied Economics, New York University.
  2. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  3. Lane, Philip R & Tornell, Aaron, 1996. " Power, Growth, and the Voracity Effect," Journal of Economic Growth, Springer, Springer, vol. 1(2), pages 213-41, June.
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  5. Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Adriana Arreaza & Bent E. Sgrensen & Oved Yosha, 1999. "Consumption Smoothing through Fiscal Policy in OECD and EU Countries," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Institutions and Fiscal Performance, pages 59-80 National Bureau of Economic Research, Inc.
  7. Vulentin, Guillermo & Vegh, Carlos A & Frankel, Jeffrey A., 2012. "On Graduation from Fiscal Procyclicality," Scholarly Articles, Harvard Kennedy School of Government 8694931, Harvard Kennedy School of Government.
  8. Blattman, Christopher & Hwang, Jason & Williamson, Jeffrey G., 2007. "Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870-1939," Journal of Development Economics, Elsevier, Elsevier, vol. 82(1), pages 156-179, January.
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  14. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," Research Department Publications, Inter-American Development Bank, Research Department 4032, Inter-American Development Bank, Research Department.
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  24. repec:nbr:nberwo:15780 is not listed on IDEAS
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  32. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 22-46, March.
  33. Nese Erbil, 2011. "Is Fiscal Policy Procyclical in Developing Oil-Producing Countries?," IMF Working Papers, International Monetary Fund 11/171, International Monetary Fund.
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Cited by:
  1. Avalos, Fernando, 2014. "Do oil prices drive food prices? The tale of a structural break," Journal of International Money and Finance, Elsevier, Elsevier, vol. 42(C), pages 253-271.
  2. Landon, Stuart & Smith, Constance, 2014. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," Working Papers, University of Alberta, Department of Economics 2014-1, University of Alberta, Department of Economics.
  3. Alexander Klemm, 2014. "Fiscal Policy in Latin America over the Cycle," IMF Working Papers, International Monetary Fund 14/59, International Monetary Fund.

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