Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

51 Pages Posted: 10 Sep 2013 Last revised: 14 Jan 2014

See all articles by Leonor Coutinho

Leonor Coutinho

Centre for Banking and Financial Research, University of Cyprus; Europrism Research

Dimitrios Georgiou

European University Institute

Maria Heracleous

University of Cyprus - Department of Economics

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Stella Tsani

Athens University of Economics and Business

Date Written: January 5, 2014

Abstract

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.

Keywords: fiscal procyclicality, commodity prices, natural resources, sovereign wealth funds, fiscal rules

JEL Classification: E62, H30

Suggested Citation

Coutinho, Leonor and Georgiou, Dimitrios and Heracleous, Maria and Michaelides, Alexander and Tsani, Stella, Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries (January 5, 2014). Available at SSRN: https://ssrn.com/abstract=2321111 or http://dx.doi.org/10.2139/ssrn.2321111

Leonor Coutinho

Centre for Banking and Financial Research, University of Cyprus ( email )

P.O. Box 20537
Nicosia, 1678
Cyprus

HOME PAGE: http://www.ucy.ac.cy/goto/hermes/en-US/HOME.aspx

Europrism Research ( email )

P.O. Box 14121
Nicosia, 2154
Cyprus

HOME PAGE: http://www.europrism.eu

Dimitrios Georgiou

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Maria Heracleous

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stella Tsani

Athens University of Economics and Business ( email )

Patision 76
Athens, 10443
Greece

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