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Title: Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

Author(s): Leonor Coutinho, Dimitrios Georgiou, Maria Heracleous, Alexander Michaelides and Stella Tsani

Publication Date: October 2013

Keyword(s): commodity prices, fiscal procyclicality, fiscal rules, natural resources and sovereign wealth funds

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Coutinho, L, Georgiou, D, Heracleous, M, Michaelides, A and Tsani, S. 2013. 'Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9672