Commodity prices and fiscal policy design: Procyclical despite a rule

Hilde Bjørnland () and Leif Thorsrud

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We analyse if the adoption of a fiscal rule insulates the domestic economy from commodity price fluctuations in a resource-rich economy. To do so we develop a timevarying Dynamic Factor Model, in which both the volatility of structural shocks and the systematic fiscal policy responses are allowed to change over time. We focus on a particular country, Norway, that is put forward as exemplary with its handling of resource wealth; income from the sale of petroleum is first saved in a sovereign wealth fund for then to be spent following a fiscal rule. We find that, contrary to common perception, fiscal policy has been more (not less) procyclical with commodity prices since the adoption of the rule. Fiscal policy has thereby exacerbated the commodity price fluctuations on the domestic economy. Still, compared to many other resource-rich economies practising a more spend-as-you-go strategy the responses are modest, as also documented in our counterfactual analysis. From a policy point of view, the implications of our findings are therefore of general interest since they highlight strengths and weaknesses of fiscal rules adopted in resource rich countries.

Keywords: Time-varying Dynamic Factor Model; commodity prices; fiscal policy; sovereign wealth fund (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 F41 Q33 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2016-05
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Commodity prices and fiscal policy design: Procyclical despite a rule (2019)
Working Paper: Commodity prices and fiscal policy design: Procyclical despite a rule (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2016-27

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