Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

Alexander Michaelides, Leonor Coutinho, Dimitrios Georgiou, Maria Heracleous and Stella Tsani

No 9672, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We provide evidence that fiscal policy in resource-rich countries is strongly procyclical. The empirical analysis reveals that on average real government consumption in these countries tends to significantly rise (fall) in good (bad) times. To control for endogeneity we use an instrumental variable for GDP growth that arises naturally, namely the growth in commodity prices of the main natural resource export. We also find that fiscal policy procyclicality is lower in more democratic regimes, and that operating a sovereign wealth fund is more successful in limiting fiscal policy procyclicality than introducing fiscal rules.

Keywords: Commodity prices; Fiscal procyclicality; Fiscal rules; Natural resources; Sovereign wealth funds (search for similar items in EconPapers)
JEL-codes: E62 H30 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-mac and nep-pub
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Citations: View citations in EconPapers (11)

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