Commodity price shocks and fiscal procyclicality in developing economies: New evidence from resource-dependent countries
Keywords:
Commodity Price, Fiscal Policy cyclicality, Government Spending, Fiscal rule, Financial Openness, Commodity Price, Fiscal Policy cyclicality, Government Spending, Fiscal rule, Financial Openness, Institutional QualityAbstract
The cyclicality of fiscal policy has long been debated in the literature, with evidence consistently showing that developing economies tend to adopt procyclical fiscal stances, unlike the countercyclical patterns observed in advanced economies. While much of the existing research has documented this procyclicality bias, limited attention has been given to the role of resource dependence in shaping fiscal behavior. This study extends the debate by investigating fiscal cyclicality in commodity-exporting developing countries, where international commodity price fluctuations critically influence fiscal revenues and expenditure decisions. Employing a panel fixed-effects model covering 2005–2021, we find robust evidence of fiscal procyclicality, driven largely by positive shocks in commodity prices. Our results further demonstrate that fiscal rules and institutional quality mitigate procyclicality, whereas, in contrast to previous studies, Financial openness is positively associated with government spending in resource-dependent economies, as rising commodity revenues and access to external capital amplify expenditures during booms, while downturns and capital reversals prompt sharp cuts, reinforcing procyclicality. Moreover, the sensitivity of government spending to commodity price fluctuations is moderated by fiscal rules and financial openness, particularly during boom periods, though this effect is weaker for revenues. These findings underscore the importance of strengthening fiscal frameworks, improving institutional capacity, and carefully managing financial openness to reduce procyclicality and enhance macroeconomic stability in commodity-dependent developing countries.
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