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The impact of commodity price volatility on fiscal balance and the role of real interest rate

Author

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  • Monoj Kumar Majumder

    (University of Tasmania
    Sher-e-Bangla Agricultural University)

  • Mala Raghavan

    (University of Tasmania
    Australian National University)

  • Joaquin Vespignani

    (University of Tasmania
    Australian National University
    Federal Reserve Bank of Dallas)

Abstract

The objective of this study is to explore the impact of commodity price volatility on the governments’ fiscal balance. Using a dynamic panel data model for 108 countries from 1993 to 2018, this study finds that governments’ fiscal balance deteriorates with commodity price volatility, especially for commodity-exporting economies. A one standard deviation increase in commodity price volatility leads to a reduction of approximately 0.04 units in the fiscal balance as a percentage of gross domestic product. Further, we examine the role of real interest rates in influencing the relationship between commodity price volatility and fiscal balance. The empirical results suggest that the negative impact of commodity price volatility on fiscal balance can be mitigated with a lower real interest rate. This implies under the sticky price assumption, an accommodative monetary policy could be effective in moderating the negative effect of commodity price volatility on fiscal balance.

Suggested Citation

  • Monoj Kumar Majumder & Mala Raghavan & Joaquin Vespignani, 2022. "The impact of commodity price volatility on fiscal balance and the role of real interest rate," Empirical Economics, Springer, vol. 63(3), pages 1375-1402, September.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:3:d:10.1007_s00181-021-02168-3
    DOI: 10.1007/s00181-021-02168-3
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    More about this item

    Keywords

    Commodity prices; Commodity price volatility; Fiscal balance; Real interest rate;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises

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