DP9672 Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

Author(s): Leonor Coutinho, Dimitrios Georgiou, Maria Heracleous, Alexander Michaelides, Stella Tsani
Publication Date: October 2013
Keyword(s): commodity prices, fiscal procyclicality, fiscal rules, natural resources, sovereign wealth funds
JEL(s): E62, H30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9672

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.