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Fiscal Adjustments and the Asymmetric Effect of Oil Shocks

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  • Valencia, Oscar
  • Gamboa-Arbeláez, Juliana
  • Sánchez, Gustavo

Abstract

This research employs a quadratic exponential model to examine the dynamics of fiscal adjustments in the context of oil shocks. The findings suggest significant state dependence, with past fiscal adjustments increasing the likelihood of future adjustments and an asymmetry in oil shock effects. Supply shocks reduce the probability of fiscal adjustments, while demand shocks increase it. Furthermore, the impact of these shocks depends on several factors. Oil demand shocks positively impact fiscal adjustment even during downturns, providing a stabilizing effect. Net oil exporters are more affected by oil shocks than importers, experiencing more significant negative effects from supply shocks and more benefits from demand shocks. Fiscal institutions play a critical role in mitigating the volatility induced by oil shocks, with fiscal rules targeting primary or structural balances proving particularly effective.

Suggested Citation

  • Valencia, Oscar & Gamboa-Arbeláez, Juliana & Sánchez, Gustavo, 2025. "Fiscal Adjustments and the Asymmetric Effect of Oil Shocks," IDB Publications (Working Papers) 13980, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:13980
    DOI: http://dx.doi.org/10.18235/0013403
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    1. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
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    3. Céspedes, Luis Felipe & Velasco, Andrés, 2014. "Was this time different?: Fiscal policy in commodity republics," Journal of Development Economics, Elsevier, vol. 106(C), pages 92-106.
    4. Caselli, Francesca & Reynaud, Julien, 2020. "Do fiscal rules cause better fiscal balances? A new instrumental variable strategy," European Journal of Political Economy, Elsevier, vol. 63(C).
    5. Banerjee, Joshua J., 2024. "Inflationary oil shocks, fiscal policy, and debt dynamics: New evidence from oil-importing OECD economies," Energy Economics, Elsevier, vol. 130(C).
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    More about this item

    Keywords

    Fiscal Adjustment; oil shocks; Fiscal Rules; asymmetric effects;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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