Fiscal Procyclicality in Commodity Exporting Countries : How Much Does It Pour andWhy ?

A large literature has documented that fiscal policy is procyclical in emerging markets anddeveloping economies and acyclical/countercyclical in advanced economies. This paper analyzes fiscalprocyclicality in commodity-exporting countries. It first shows that the degree of fiscal procyclicality is twice ashigh in commodity exporters than in non-commodity exporters. Further, while fiscal procyclicality has been falling incommodity exporters over the past 15 years, it is still pervasive and has fallen slower than in non-commodityexporting countries. In addition to testing the main theories behind fiscal procyclicality in commodity exportersand the role of institutional variables, the paper makes two novel contributions. First, based on the idea of fiscalprocyclicality as a “when it rains, it pours” phenomenon (that is, contractionary fiscal policy amplifies the effectsof a fall in commodity prices), the paper shows that, on average, government spending amplifies the business cycle by 21 percent of the initial drop in output following a fall incommodity prices. Put differently, the “pours” component accounts for 17 percent of the total fall in output. Second,the paper estimates the welfare costs of fiscal procyclicality at 2.6 percent of the costs associated withthe regular business cycle in commodity exporters.