Why higher fiscal spending persists when a boom in primary commodities ends
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.
|Date of creation:||30 Apr 1994|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alesina, A. & Drazen, A., 1991.
"Why Are Stabilizations Delayed?,"
6-91, Tel Aviv - the Sackler Institute of Economic Studies.
- Newey, Whitney & West, Kenneth, 2014.
"A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix,"
Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- 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.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- 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.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Cuddington, John, 1989. "Commodity Export Booms in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(2), pages 143-65, July.
- 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.
- Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
- Cuddington, John, 1988. "Fiscal policy in commodity-exporting LDCs," Policy Research Working Paper Series 33, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1295. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.