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Why higher fiscal spending persists when a boom in primary commodities ends

  • Boccara, Bruno
  • DEC
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    The author analyzes the fiscal policy of primary commodity exporters. After the initial boom in fiscal spending that accompanies a commodity boom, he asks, why do commodity-exporting countries tend to maintain higher spending levels despite a drop in commodity prices. He identifies three factors that might explain the tendency: a pressure (from political constituents, for example) to keep spending, the difficulty of reversing policy (or disinvesting - the costs of firing people, for example), and the effects of limited indebtedness, or credit-rationing constraints. Fiscal policy must be developed with these three factors in mind. Using a fiscal policy optimizing model, the author examines evidence for the existence of these three factors. He uses the model's unconstrained and constrained Euler equations to estimate the Lagrange multipliers associated with the limited indebtedness constraint. The empirical work is done using data from Africa's franc zone countries. The persistence of pressure to spend may not play an important role, says the author. More important in explaining the tendency to maintain spending levels after a commodity boom ends are liquidity constraints and the costs of policy reversal.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1295.

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    Date of creation: 30 Apr 1994
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    Handle: RePEc:wbk:wbrwps:1295
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    1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    2. Cuddington, John T. & Urzua, Carlos M., 1989. "Trends and cycles in Colombia's real GDP and fiscal deficit," Journal of Development Economics, Elsevier, vol. 30(2), pages 325-343, April.
    3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    5. Cuddington, John, 1988. "Fiscal policy in commodity-exporting LDCs," Policy Research Working Paper Series 33, The World Bank.
    6. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
    7. Cuddington, John, 1989. "Commodity Export Booms in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(2), pages 143-65, July.
    8. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
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