Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease

34 Pages Posted: 12 Apr 2010

See all articles by Rabah Arezki

Rabah Arezki

World Bank - African Development Bank

Kareem Ismail

International Monetary Fund (IMF)

Date Written: April 2010

Abstract

We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries.

Keywords: Business cycles, Commodity price fluctuations, Economic models, Fiscal policy, Government expenditures, International trade, Natural resources, Oil exports, Oil producing countries, Political economy, Real effective exchange rates, Revenue mobilization

Suggested Citation

Arezki, Rabah and Ismail, Kareem, Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease (April 2010). IMF Working Paper No. 10/94, Available at SSRN: https://ssrn.com/abstract=1586683

Rabah Arezki (Contact Author)

World Bank - African Development Bank ( email )

15 Avenue du Ghana
P.O.Box 323-1002
Tunis-Belvedère
Tunisia

Kareem Ismail

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
134
Abstract Views
960
Rank
456,604
PlumX Metrics