The impact of commodity price volatility on fiscal balance and the role of real interest rate

Monoj Kumar Majumder, Mala Raghavan () and Joaquin Vespignani

Empirical Economics, 2022, vol. 63, issue 3, No 8, 1375-1402

Abstract: Abstract The objective of this study is to explore the impact of commodity price volatility on the governments’ fiscal balance. Using a dynamic panel data model for 108 countries from 1993 to 2018, this study finds that governments’ fiscal balance deteriorates with commodity price volatility, especially for commodity-exporting economies. A one standard deviation increase in commodity price volatility leads to a reduction of approximately 0.04 units in the fiscal balance as a percentage of gross domestic product. Further, we examine the role of real interest rates in influencing the relationship between commodity price volatility and fiscal balance. The empirical results suggest that the negative impact of commodity price volatility on fiscal balance can be mitigated with a lower real interest rate. This implies under the sticky price assumption, an accommodative monetary policy could be effective in moderating the negative effect of commodity price volatility on fiscal balance.

Keywords: Commodity prices; Commodity price volatility; Fiscal balance; Real interest rate (search for similar items in EconPapers)
JEL-codes: E58 E62 G01 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-021-02168-3

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