Fiscal Procyclicality in Commodity Exporting Countries: How Much does it Pour and Why?

Abstract

A large literature has documented that fiscal policy is procyclical in emerging markets and developing economies and acyclical/countercyclical in advanced economies. This paper analyzes fiscal procyclicality in commodity-exporting countries. It first shows that the degree of fiscal procyclicality is twice as high in commodity exporters than in non-commodity exporters. Further, while fiscal procyclicality has been falling in commodity exporters over the past 15 years, it is still pervasive and has fallen slower than in non-commodity exporting countries. In addition to testing the main theories behind fiscal procyclicality in commodity exporters and the role of institutional variables, the paper makes two novel contributions. First, based on the idea of fiscal procyclicality as a “when it rains, it pours” phenomenon (that is, contractionary fiscal policy amplifies the effects of 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 in commodity 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 with the regular business cycle in commodity exporters.