Fiscal Procyclicality in Commodity Exporting Countries: How Much Does It Pour and Why?

A large literature has documented that fiscal policy is procyclical in emerging markets/developing countries and acyclical/countercyclical in advanced economies.

A large literature has documented that fiscal policy is procyclical in emerging markets/developing countries and acyclical/countercyclical in advanced economies. This paper analyzes fiscal procyclicality in commodity-exporting countries. The paper makes two novel contributions. First, based on the “when it rains, it pours” phenomenon (that is, contractionary fiscal policy amplifies the business cycle), the paper shows that, on average, government spending magnifies the business cycle by 21 percent of the initial drop in output following a fall in commodity prices. Second, the paper estimates the welfare costs of fiscal procyclicality at 36 percent of the commodity business cycle. (JEL E32, E62, F14, H50, O19, Q02)