Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

54 Pages Posted: 7 Oct 2013

See all articles by Dimitrios Georgiou

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)

stela cani

University of Reading

Date Written: October 2013

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

JEL Classification: E62, H30

Suggested Citation

Georgiou, Dimitrios and Heracleous, Maria and Michaelides, Alexander and cani, stela, Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries (October 2013). CEPR Discussion Paper No. DP9672. Available at SSRN: https://ssrn.com/abstract=2337002

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

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

Stela Cani

University of Reading

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