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.
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