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Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease

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  • Kareem Ismail
  • Rabah Arezki

Abstract

We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model''s theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/94.

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Length: 33
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/94

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Keywords: Commodity price fluctuations; Economic models; Government expenditures; Natural resources; Oil exports; Oil producing countries; Real effective exchange rates; Revenue mobilization; export value; reer; fiscal rules; fiscal policy; oil export; export unit; capital expenditure; government spending; real effective exchange rate; public expenditure; fiscal institutions; fiscal adjustment; fiscal rule; fiscal response; exporting countries; government expenditure; fiscal authorities; capital expenditures; expenditure policy; fiscal institution; oil-exporting countries; oil exporting countries; budget constraint; expenditure cuts; public expenditures; government budget; discretionary fiscal policy; public spending; fiscal strategy; fiscal policy formulation; budget deficit; fiscal policy responses; public finance; open economy macroeconomics; exporters; expansionary fiscal policy; oil- exporting countries; expansionary fiscal; state government expenditure; fiscal revenue; exporting developing countries; taxation; expenditure adjustment; expenditure composition; oil exporting;

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Citations

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Cited by:
  1. Gurvich, E. & Prilepskiy, I., 2010. "What Determined the Depth of Recession?," Journal of the New Economic Association, New Economic Association, New Economic Association, issue 8, pages 55-79.
  2. Frankel, Jeffrey A., 2011. "A Solution to Overoptimistic Forecasts and Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile," Scholarly Articles 4723209, Harvard Kennedy School of Government.
  3. Rabah Arezki & Mustapha K. Nabli, 2012. "Natural Resources, Volatility, and Inclusive Growth: Perspectives from the Middle East and North Africa," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 086, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  4. Jeffrey Frankel, 2011. "A Solution to Fiscal Procyclicality: the Structural Budget Institutions Pioneered by Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 14(2), pages 39-78, August.
  5. Carlos Gustavo Cano, . "Regla fiscal y estabilidad macroeconómica en Colombia," Borradores de Economia 607, Banco de la Republica de Colombia.
  6. Nese Erbil, 2011. "Is Fiscal Policy Procyclical in Developing Oil-Producing Countries?," IMF Working Papers 11/171, International Monetary Fund.
  7. Jimena Zúñiga & Marcelo Capello & Inés Butler & Nester Grión, 2013. "A Cycle-Adjusted Fiscal Rule for Sustainable and More Equitable Growth in Argentina," IDB Publications 82358, Inter-American Development Bank.
  8. Pablo Lopez Murphy & Mauricio Villafuerte & Rolando Ossowski, 2010. "Riding the Roller Coaster," IMF Working Papers 10/251, International Monetary Fund.
  9. El Anshasy, Amany A. & Bradley, Michael D., 2012. "Oil prices and the fiscal policy response in oil-exporting countries," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(5), pages 605-620.
  10. Frankel, Jeffrey A., 2011. "Over-optimism in Forecasts by Official Budget Agencies and its Implications," Scholarly Articles 8705906, Harvard Kennedy School of Government.
  11. Mustapha K. Nabli & Rabah Arezki, 2012. "Natural Resources, Volatility, and Inclusive Growth," IMF Working Papers 12/111, International Monetary Fund.
  12. Frankel, Jeffrey A., 2012. "The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp12-014, Harvard University, John F. Kennedy School of Government.
  13. Mauricio Villafuerte & Pablo López-Murphy & Rolando Ossowski, 2011. "Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resources Exporters in Latin America and the Caribbean ," Working Papers Central Bank of Chile, Central Bank of Chile 609, Central Bank of Chile.
  14. Ahmed Saber, Mahmud & Syed Abul, Basher, 2014. "Price volatility and the political economy of resource-rich nations," MPRA Paper 56564, University Library of Munich, Germany.
  15. Frankel, Jeffrey A., 2011. "How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?," Scholarly Articles 4735392, Harvard Kennedy School of Government.
  16. Riman, Hodo B. & Akpan, Emmanuel S. & Offiong, Amenawo I, 2013. "Asymetric Effect of Oil Price Shocks on Exchange Rate Volatility and Domestic Investment in Nigeria," MPRA Paper 53282, University Library of Munich, Germany, revised 21 Aug 2013.

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