Commodity Prices and Fiscal (Pro)Cyclicality

Ivan Petrella, Luciana Juvenal and Federico Di Pace

No 19586, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Fiscal policy in Emerging Markets and Developing Economies (EMDEs) is often characterized as procyclical. We show that considering conditional responses to macroeconomic shocks is crucial when evaluating fiscal cyclicality. We study the effects of exogenous commodity price shocks on fiscal policy in EMDEs by exploiting major narrative episodes and the heterogeneous exposure of countries to these shocks. Following a positive terms-of-trade shock, government spending rises, and tax rates increase. Fiscal instruments respond in opposite directions: spending is procyclical, while tax policy is countercyclical. These findings contrast with conventional wisdom but align with the optimal policy response to export price shocks predicted by a multi-good small open economy model with incomplete financial markets. We also highlight the role of institutional quality in shaping fiscal policy responses.

JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2024-10
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Working Paper: Commodity Prices and Fiscal (Pro)Cyclicality (2025)
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