A Commodity Curse? The Dynamic Effects of Commodity Prices on Fiscal Performance in Latin America
37 Pages Posted: 5 Apr 2010 Last revised: 11 Apr 2010
Date Written: March 1, 2010
The recent boom and bust in commodity prices has raised concerns about the impact of volatile commodity prices on Latin American countries’ fiscal positions. Using a novel quarterly data set - which includes unique country-specific commodity price indices and a comprehensive measure of public expenditures - this paper analyzes the dynamic effects of commodity price fluctuations on fiscal revenues and expenditures for eight commodity-exporting Latin American countries. The results indicate that Latin American countries’ fiscal positions generally react strongly to shocks to commodity prices, yet there are marked differences across countries in observed reactions. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures reacting significantly more than revenues. At the other end of the spectrum, in Chile expenditure reacts very little to commodity price fluctuations, and the dynamic responses of fiscal indicators are very similar to those seen in high-income commodity-exporting countries. This distinct behavior across countries likely reflects the efficient application of fiscal rules, accompanied by strong institutions, political commitment and high standards of transparency.
Keywords: Commodity Prices, Fiscal Policy, Procyclicality, Macroeconomics, Revenues, Expenditures, Latin America
JEL Classification: E62, H50, O13
Suggested Citation: Suggested Citation