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Fiscal Policy Adjustment to Shocks in Commodity-Producing Countries

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  • Karlygash Kuralbayeva

Abstract

This paper investigates the optimal scal policy adjustment to adverse terms of trade shocks by commodity-producing countries within a general equilibrium model,which allows for explicit distinction between public investment and government consumption. As the private sector has limited room for maneuver in correcting the shock itself, the public sector is used to isolate the economy from external fluctuations. The ability of fiscal policy to shield the economy from external shocks critically depends on instruments available to government. In the presence of international capital market imperfections, the shock is absorbed primarily through a combination of reduced expenditure and higher taxes. Cuts in expenditure are carried out mostly through cuts in public investment, with the change in the levelof public investment being about ten times larger than the change in government consumption. Public investment is thus the main shock absorber in this situation and is highly pro-cyclical. In the absence of distortions on the international capital markets, government shifts from domestic sources to external sources to absorb the shock and resorts to increased external borrowing to finance the shortfall in revenues. In this case, responses of both public investment and government consumption are more smoothed and less pro-cyclical, whereas tax rate falls.

Suggested Citation

  • Karlygash Kuralbayeva, 2011. "Fiscal Policy Adjustment to Shocks in Commodity-Producing Countries," OxCarre Working Papers 060, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:060
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    File URL: http://www.oxcarre.ox.ac.uk/images/stories/papers/ResearchPapers/oxcarrerp201160.pdf
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    References listed on IDEAS

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    Cited by:

    1. Rhenals Monterrosa, Remberto & Gómez, Wilman, 2013. "La coyuntura macroeconómica reciente," PERFIL DE COYUNTURA ECONÓMICA, UNIVERSIDAD DE ANTIOQUIA - CIE, issue 22, pages 9-38, July.
    2. Jair N. Ojeda & Julián A. Parra-Polanía & Carmiña O. Vargas, 2014. "Natural-Resource Booms, Fiscal Rules and Welfare in a Small Open Economy," BORRADORES DE ECONOMIA 011132, BANCO DE LA REPÚBLICA.

    More about this item

    Keywords

    fiscal policy; adjustment; external shocks; commodity-producing countries;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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