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The Dynamic Effects of Commodity Priceson Fiscal Performance in Latin America

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  • Leandro Medina

Abstract

The recent boom and bust in commodity prices has raised concerns about the impact of volatile commodity prices on Latin American countries’ fiscal positions. Using a novel quarterly data set-which includes unique country-specific commodity price indices and a comprehensive measure of public expenditures-this paper analyzes the dynamic effects of commodity price fluctuations on fiscal revenues and expenditures for eight commodity-exporting Latin American countries. The results indicate that Latin American countries’ fiscal positions react strongly to shocks to commodity prices, yet there are marked differences across countries. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures reacting significantly more than revenues. At the other end of the spectrum, in Chile expenditure reacts very little to commodity price fluctuations, and the dynamic responses of its fiscal indicators are very similar to those seen in high-income commodity-exporting countries. This distinct behavior across countries may relate to institutional arrangements, which in some cases include the efficient application of fiscal rules amid political commitment and high standards of transparency.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/192.

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Length: 27
Date of creation: 01 Aug 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/192

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Keywords: Commodity prices; Latin America; External shocks; Fiscal sector; fiscal positions; exporting countries; fiscal policy; price fluctuations; fiscal rules; fiscal variables; fiscal revenues; dynamic effects; government expenditures; government spending; primary expenditure; fiscal performance; expenditure growth; fiscal responsibility; trade classification; government expenditure; international trade; commodity exporters; export price; fiscal indicators; fiscal consolidation; capital expenditures; export shares; fiscal rule; public expenditure; fiscal balance; fiscal responsibility laws; tax policy; trade data; expenditure programs; fiscal multiplier; public finances; prudent fiscal policies; fiscal outcomes; global trade; budget deficit; tax base; trade shocks; public expenditures; fiscal responsibility act; fiscal behavior; fiscal management; fiscal record; fiscal institutions; export taxes; fiscal arrangements; dynamic impact; world prices; export prices; fiscal revenue; budget balance; fiscal policies; commodity composition; value of exports; fiscal policy decisions; fiscal framework; fiscal deficit; fiscal discipline; fiscal spending;

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References

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  1. Sambit Bhattacharyya & Jeffrey G. Williamson, 2009. "Commodity Price Shocks and the Australian Economy since Federation," NBER Working Papers 14694, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Ilzetzki, Ethan, 2006. "Rent seeing distortions and fiscal procyclicality," MPRA Paper 8726, University Library of Munich, Germany, revised 01 Dec 2007.
  4. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," CSAE Working Paper Series 2007-15, Centre for the Study of African Economies, University of Oxford.
  5. Ricardo J. Caballero & Arvind Krishnamurthy, 2004. "Fiscal Policy and Financial Depth," NBER Working Papers 10532, National Bureau of Economic Research, Inc.
  6. Raddatz, Claudio, 2005. "Are external shocks responsible for the instability of output in low income countries?," Policy Research Working Paper Series 3680, The World Bank.
  7. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
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Citations

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Cited by:
  1. Andrea Bonilla, 2014. "External vulnerabilities and economic integration. Is the Union of South American Nations a promising project ?," Working Papers halshs-00945044, HAL.
  2. Carlos Gustavo Cano Sanz & César Vallejo Mejía & Edgar Caicedo García & Juan Sebastian Amador Torres & Evelyn Yohana Tique Calderón, 2012. "El mercado mundial del café y su impacto en Colombia," Borradores de Economia 710, Banco de la Republica de Colombia.
  3. Munir Jalil & Esteban Tamayo, 2011. "Pass-through of International Food Prices to Domestic Inflation During and After the Great Recession: Evidence from a Set of Latin American Economies," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  4. Brière, Marie, 2012. "Managing Commodity Risk : Can Sovereign Funds Help ?," Economics Papers from University Paris Dauphine 123456789/7740, Paris Dauphine University.
  5. Leandro Medina & Carlos Caceres & Ana Corbacho, 2010. "Structural Breaks in Fiscal Performance," IMF Working Papers 10/248, International Monetary Fund.
  6. Rafael Alvarado & Miguel Atienza, 2014. "The role of market access and human capital in regional wage disparities: Empirical evidence for Ecuador," Documentos de Trabajo en Economia y Ciencia Regional 53, Universidad Catolica del Norte, Chile, Department of Economics, revised Mar 2014.
  7. Stephen Snudden, 2013. "Cyclical Fiscal Rules for Oil-Exporting Countries," IMF Working Papers 13/229, International Monetary Fund.
  8. Avalos, Fernando, 2014. "Do oil prices drive food prices? The tale of a structural break," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 253-271.
  9. Hélène Ehrhart & Samuel Guerineau, 2012. "Commodity price volatility and Tax revenues: Evidence from developing countries," Working Papers halshs-00658210, HAL.
  10. Samuel Guerineau & Hélène Ehrhart, 2012. "The impact of high and volatile commodity prices on public finances: Evidence from developing countries," Working Papers halshs-00659100, HAL.
  11. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.
  12. Carlos Caceres & Leandro Medina, 2012. "Measures of Fiscal Risk in Hydrocarbon-Exporting Countries," IMF Working Papers 12/260, International Monetary Fund.
  13. Samuel Guerineau & Hélène Ehrhart, 2012. "The impact of high and volatile commodity prices on public finances: Evidence from developing countries," Working Papers halshs-00659098, HAL.
  14. Issouf Samaké & Nicola Spatafora, 2012. "Commodity Price Shocks and Fiscal Outcomes," IMF Working Papers 12/112, International Monetary Fund.
  15. Roland Döhrn & Philipp an de Meulen & Tobias Kitlinski & Torsten Schmidt & Simeon Vosen, 2010. "Die wirtschaftliche Entwicklung im Ausland zur Jahresmitte 2010 - Der erste Schwung ist vorüber," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 32, 09.

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