Commodity Price Shocks and the Odds on Fiscal Performance: A Structural VAR Approach

Abstract

Unanticipated changes in commodity prices can generate significant movements in fiscal aggregates. This paper seeks to understand the dynamics of these fiscal movements in the context of transitory commodity price shocks using sample data from four CIS countries: two oil-producing and two non-oil commodity-intensive countries. It adopts a structural VAR approach and identifies the dynamic effects of commodity price shocks on fiscal performance under two broad tax regimes. Stochastic simulations indicate high probabilities of fiscal over-performance in the short term when commodity prices are high. These probabilities deteriorate significantly, however, in the long term after the transitory positive commodity price shock has dissipated, particularly when lax fiscal policy is adopted during the period of the price boom.

Keywords: Commodity price shocks, structural VAR, tax regimes, pro-cyclical fiscal policy

JEL Classification: C50, E62, E66