One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence

Arthur Mendes and Steven Pennings

Review of Economic Dynamics, 2025, vol. 55

Abstract: This paper reevaluates the common characterization of commodity-exporting developing economies as having excessively procyclical fiscal policy. We develop a new measure of fiscal procyclicality—the marginal propensity to spend (MPS) an extra dollar of commodity revenues—which we estimate in a panel of countries and compare with optimal policy in a New Keynesian model. Empirically, fiscal policy is procyclical on average (MPS=0.25), but heterogeneous. Countries with fixed exchange rates (ER) are almost acyclical, but countries with flexible ERs are procyclical and the MPS increases with the persistence of commodity price shocks. Optimal policy in the model is similar qualitatively but differs quantitatively in some dimensions. Under fixed ERs, optimal policy is almost acyclical to stabilize the business cycle. However, under flexible ERs, monetary policy stabilizes the business cycle, so fiscal policy is procyclical because commodity price shocks are typically persistent and so should be spent by the permanent income hypothesis. (Copyright: Elsevier)

Keywords: Fiscal rules; Commodity price shocks; Exchange rate regime; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E62 F4 O23 Q31 Q33 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1016/j.red.2024.101239

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