Limiting fiscal procyclicality: Evidence from resource-dependent countries

We provide evidence that fiscal policy in resource-dependent countries is 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 in countries with stronger checks and balances on the executive. Operating a sovereign wealth fund can help limit fiscal policy procyclicality in some instances, while we find no such evidence for fiscal rules.

Automated summary

Evidence shows that fiscal policy in resource-dependent countries is procyclical, but less so in more democratic regimes and countries with stronger checks and balances. Sovereign wealth funds can limit procyclicality in some cases, while there is no evidence supporting fiscal rules in this regard.