Oil prices and the fiscal policy response in oil-exporting countries

This paper empirically investigates the role that oil prices play in determining fiscal policy in oil-exporting countries. We derive and estimate a fiscal policy equation that links government spending not only to oil price shocks, but also to oil price volatility and the skewness of oil price changes. We find that in the long run, higher oil prices induce larger government size. In the short run, however, government expenditures rise less than proportionately to the increase in oil revenues, reflecting increasing prudence in fiscal policy in oil producing countries. This result is robust to using a variety of specifications of the oil price shock, and to using different sample periods. (c) 2011 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.