One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence
Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price w...
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World Bank, Washington, DC
2020
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| Online Access: | http://documents.worldbank.org/curated/en/364551600195983043/One-Rule-Fits-All-Heterogeneous-Fiscal-Rules-for-Commodity-Exporters-When-Price-Shocks-Can-Be-Persistent-Theory-and-Evidence http://hdl.handle.net/10986/34486 |
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okr-10986-344862022-09-20T00:11:04Z One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence Mendes, Arthur Pennings, Steven FISCAL POLICY COMMODITY PRICES COMMODITY EXPORTERS PRICE VOLATILITY CYCLICALITY PRICE SHOCK Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price windfalls and maintain spending during price busts. This paper questions this characterization and policy advice. Using a New Keynesian model, it finds that optimal fiscal policy is heterogeneous depending on the commodity exported and exchange rate regime. Optimal fiscal policy is often procyclical in countries with floating exchange rates because many commodity price shocks are highly persistent, and so they should be spent according to the permanent income hypothesis. In contrast, in countries with fixed exchange rates, optimal fiscal policy becomes countercyclical to smooth the business cycle. Empirically, the paper introduces a new measure of fiscal cyclicality, the marginal propensity to spend (MPS) an extra dollar of commodity revenues, and shows that it is moderately procyclical overall but highly heterogeneous across countries depending on their characteristics. Consistent with theory, the MPS is more procyclical in countries with floating exchange rates than those with fixed exchange rates. Moreover, in countries with floating exchange rates, the MPS is higher in countries facing more persistent commodity price shocks. 2020-09-18T14:13:18Z 2020-09-18T14:13:18Z 2020-09 Working Paper http://documents.worldbank.org/curated/en/364551600195983043/One-Rule-Fits-All-Heterogeneous-Fiscal-Rules-for-Commodity-Exporters-When-Price-Shocks-Can-Be-Persistent-Theory-and-Evidence http://hdl.handle.net/10986/34486 English Policy Research Working Paper;No. 9400 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
FISCAL POLICY COMMODITY PRICES COMMODITY EXPORTERS PRICE VOLATILITY CYCLICALITY PRICE SHOCK |
| spellingShingle |
FISCAL POLICY COMMODITY PRICES COMMODITY EXPORTERS PRICE VOLATILITY CYCLICALITY PRICE SHOCK Mendes, Arthur Pennings, Steven One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| relation |
Policy Research Working Paper;No. 9400 |
| description |
Commodity-exporting developing economies
are often characterized as having needlessly procyclical
fiscal policy: spending when commodity prices are high and
cutting back when prices fall. The standard policy advice is
instead to save during price windfalls and maintain spending
during price busts. This paper questions this
characterization and policy advice. Using a New Keynesian
model, it finds that optimal fiscal policy is heterogeneous
depending on the commodity exported and exchange rate
regime. Optimal fiscal policy is often procyclical in
countries with floating exchange rates because many
commodity price shocks are highly persistent, and so they
should be spent according to the permanent income
hypothesis. In contrast, in countries with fixed exchange
rates, optimal fiscal policy becomes countercyclical to
smooth the business cycle. Empirically, the paper introduces
a new measure of fiscal cyclicality, the marginal propensity
to spend (MPS) an extra dollar of commodity revenues, and
shows that it is moderately procyclical overall but highly
heterogeneous across countries depending on their
characteristics. Consistent with theory, the MPS is more
procyclical in countries with floating exchange rates than
those with fixed exchange rates. Moreover, in countries with
floating exchange rates, the MPS is higher in countries
facing more persistent commodity price shocks. |
| format |
Working Paper |
| author |
Mendes, Arthur Pennings, Steven |
| author_facet |
Mendes, Arthur Pennings, Steven |
| author_sort |
Mendes, Arthur |
| title |
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| title_short |
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| title_full |
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| title_fullStr |
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| title_full_unstemmed |
One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent : Theory and Evidence |
| title_sort |
one rule fits all? heterogeneous fiscal rules for commodity exporters when price shocks can be persistent : theory and evidence |
| publisher |
World Bank, Washington, DC |
| publishDate |
2020 |
| url |
http://documents.worldbank.org/curated/en/364551600195983043/One-Rule-Fits-All-Heterogeneous-Fiscal-Rules-for-Commodity-Exporters-When-Price-Shocks-Can-Be-Persistent-Theory-and-Evidence http://hdl.handle.net/10986/34486 |
| _version_ |
1764481003420647424 |