BIS Working Papers No 365. Was This Time Different?: Fiscal Policy in Commodity Republics. Monetary and Economic Department

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1 BIS Working Papers No 365 Was This Time Differen?: Fiscal Policy in Commodiy Republics by Luis Felipe Céspedes and Andrés Velasco, Discussion Commens by Choongsoo Kim and Guillermo Calvo Moneary and Economic Deparmen November 2011 JEL classificaion: E6, F4, H3 Keywords: Commodiy prices, opimal fiscal policy, fiscal behavior, insiuions.

2 BIS Working Papers are wrien by members of he Moneary and Economic Deparmen of he Bank for Inernaional Selemens, and from ime o ime by oher economiss, and are published by he Bank. The papers are on subjecs of opical ineres and are echnical in characer. The views expressed in hem are hose of heir auhors and no necessarily he views of he BIS. This publicaion is available on he BIS websie (www.bis.org). Bank for Inernaional Selemens All righs reserved. Brief excerps may be reproduced or ranslaed provided he source is saed. ISSN (prin) ISBN (online)

3 Foreword On June 2011, he BIS held is Tenh Annual Conference, on Fiscal policy and is implicaions for moneary and financial sabiliy in Lucerne, Swizerland. The even brough ogeher senior represenaives of cenral banks and academic insiuions who exchanged views on his opic. The papers presened a he conference and he discussans commens are released as BIS Working Papers 361 o 365. A forhcoming BIS Paper will conain he opening address of Sephen Cecchei (Economic Adviser, BIS), a keynoe address from Marin Feldsein, and he conribuions of he policy panel on Fiscal policy susainabiliy and implicaions for moneary and financial sabiliy. The paricipans in he policy panel discussion, chaired by Jaime Caruana (General Manager, BIS), were José De Gregorio (Bank of Chile), Peer Diamond (Massachusses Insiue of Technology) and Peer Prae (European Cenral Bank). iii

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5 Table of conens Foreword... iii Conference programme... vii Was This Time Differen?: Fiscal Policy in Commodiy Republics (by Luis Felipe Céspedes and Andrés Velasco) Inroducion Wha heory predics The case of a single policymaker The governmen budge consrain Governmen preferences and opimal policy The effecs of shocks Many policymakers and he voraciy effec The fiscal policy problem wih many groups The effecs of shocks Commodiy prices and heir behavior The behavior of macro variables during commodiy price booms The cyclical behavior of fiscal policy across commodiy boom episodes Wha caused he change in fiscal behavior? Conclusions References Discussan commens by Choongsoo Kim Discussan commens by Guillermo Calvo v

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7 Programme Thursday 23 June :15 13:30 Informal buffe luncheon 13:45 14:00 Opening remarks by Sephen Cecchei (BIS) 14:00 15:30 Session 1: The risks and challenges of long-erm fiscal susainabiliy Chair: Auhor: Discussans: Coffee break (30 min) Øysein Olsen (Cenral Bank of Norway) Alan Auerbach (Universiy of California, Berkeley) Long-erm fiscal susainabiliy in major economies Pier Carlo Padoan (OECD) Ray Barrell (NIESR) 16:00 17:30 Session 2: The effecs of fiscal consolidaion Chair: Auhor: Discussans: 19:00 Dinner Keynoe lecure: Sefan Ingves (Sveriges Riksbank) Robero Peroi (Universiá Bocconi) The auseriy myh : gain wihou pain? Carlo Coarelli (IMF) Harald Uhlig (Universiy of Chicago) Marin Feldsein (Harvard Universiy/NBER) Friday 24 June :00 9:30 Session 3: Fiscal policy and financial sabiliy Chair: Auhor: Discussans: Coffee break (30 min) Parick Honohan (The Cenral Bank of Ireland) Carmen Reinhar (Peerson Insiue for Inernaional Economics) The liquidaion of governmen deb Ignazio Visco (Bank of Ialy) Alan Taylor (Universiy of California Morgan Sanley) 10:00 11:30 Session 4: Fiscal policy and inflaion Chair: Auhor: Discussan: Coffee break (15 min) Prasarn Trairavorakul (Bank of Thailand) Eric Leeper (Indiana Universiy) Percepions and mispercepions of fiscal Inflaion Chrisopher Sims (Princeon Universiy) Michael Bordo (Rugers Universiy) vii

8 Friday 24 June 2011 (con) 11:45 13:15 Session 5: Fiscal policy challenges in EMEs Chair: Auhor: Discussans: 13:15 Lunch Axel Weber (The Universiy of Chicago Booh School of Business) Andrés Velasco (Harvard Kennedy School) Was his ime differen? Fiscal policy in commodiy republics Choongsoo Kim (Bank of Korea) Guillermo Calvo (Columbia Universiy) 15:00 16:30 Panel discussion Fiscal policy susainabiliy and implicaions for moneary and financial sabiliy Chair: Panelliss: Jaime Caruana (BIS) José De Gregorio (Cenral Bank of Chile) Peer Diamond (Massachuses Insiue of Technology) Peer Prae (European Cenral Bank) viii

9 Was This Time Differen?: Fiscal Policy in Commodiy Republics 1 Luis Felipe Céspedes 2 and Andrés Velasco 3 Inroducion According o sandard economic heory, fiscal policy should be counercyclical. In he neoclassical smoohing model of Barro (1979), a governmen should opimally run surpluses in good imes and deficis in bad imes. 4 Tha is he same a governmen should do, hough for differen reasons, in he sandard Keynesian or neo-keynesian framework. Ye in pracice governmens ofen seem o follow a pro-cyclical fiscal policy. Cuddingon (1989), Talvi and Vegh (2005) and Sinno (2009), among ohers, documen ha governmens save lile or even disave in booms. Procyclicaliy is mos eviden in Lain America (Gavin e al (1996), Gavin and Peroi (1997), Sein e al (1999)) bu is also presen in OECD counries (Talvi and Vegh (2005), Arreaza e al (1999), Lane (2003)). The problem of procyclicaliy seems o be especially acue for commodiy-rich naions commodiy republics in he nomenclaure of his paper. In hose counries, commodiy-linked revenues (axes, royalies, profis) can be a large porion of governmen revenue (see Sinno (2009)). And by any measure, commodiy price volailiy is large. As a resul, overall revenues are quie volaile and so can be spending and he fiscal balance. If expendiures reac more han proporionally o revenue increases, hen he fiscal balance can move wih he cycle. In his paper we revisi he issue of fiscal procyclicaliy in commodiy republics. Given ha he behavior of commodiy prices is plausibly a main driver of fiscal policy oucomes in hese counries, we focus on he behavior of fiscal variables across he commodiy cycle, in conras o behavior across he oupu cycle, which has been he main focus of earlier research on fiscal procyclicaliy. The paper has wo goals. Firs, o documen he behavior of fiscal policy (and oher macro variables) for a large number of commodiy-producing over a long period of ime. Second, o see wheher he behavior of fiscal policy in such counries has changed over ime. In paricular, we wish o es he hypohesis ha " his ime was differen", wih fiscal policy behaving less procyclically and perhaps even counercyclically in he recen commodiy boom episode, as commodiy-producing naions improved he rules and insiuions ha govern heir fiscal policies. We begin by consrucing a commodiy price index for a group of 50 economies, incorporaing informaion on he imporance of each commodiy in he oal commodiy oupu Paper prepared for he BIS 10h Annual Conference, Lucerne, Swizerland, June 23-24, We are graeful o Yan Carriere and Sergio Salgado for excellen research assisanship and o Crisian Muñoz for daa collecion. We are also graeful o Luis Caao for sharing his daa wih us. We hank our discussans Guillermo Calvo and Choongsoo Kim for very useful commens and suggesions. We also hank Harald Uhlig and conference paricipans for fruiful discussions and suggesions. Universidad Adolfo Ibáñez. Columbia Universiy and NBER. If, of course, he flucuaions are expeced o be emporary, no permanen. We reurn o his poin below. 1

10 of he counry for he period Using ha index we idenify commodiy boom episodes: periods of significan increases in commodiy prices in he period for he same group of 50 economies. We define a commodiy boom episode as a period in which our domesic producion-weighed commodiy price index surpasses is hisorical rend by a cerain hreshold margin. For almos every counry under sudy we idenify wo boom episodes: one aking place in he 1970s and early 1980s, and anoher in he years immediaely prior o Nex we sudy he behavior of key fiscal variables surrounding hese commodiy boom episodes wih paricular focus on fiscal variables. We analyze how real governmen expendiures, real governmen revenues and he fiscal balance behave over he commodiy price cycle. Then we sudy how pro-cyclical or counercyclical fiscal policy was during hese episodes. To ha end, and using wo differen specificaions, we esimae coefficiens ha capure, counry by counry, he response of fiscal variables o movemens in commodiy prices. This firs se of resuls suggess ha he fiscal policy of many commodiy republics was indeed quie procyclical in he earlier boom episode. For insance, in several cases we idenify a negaive relaionship beween he fiscal balance (as a percenage of GDP) and he behavior of commodiy prices. Tha is, he fiscal balance deerioraes as commodiy prices increase, in exacly he opposie fashion o wha heory would sugges. To es he esablished wisdom ha " his ime was differen" wih regard o he conduc of fiscal policy in commodiy-rich naions, we look for sysemaic differences beween he mos recen episode of increases in commodiy prices and he previous episode. The resuls are encouraging: here is evidence of reduced procyclicaliy in a number of counries. The number of negaive relaionships beween he fiscal balances and commodiy prices drops significanly, showing here are fewer any counries whose fiscal policy seems o have been overly procyclical in he recen episode. Behind his is change sands an improvemen in he cyclical behavior of revenues. Regarding he behavior of expendiure, our evidence poins owards a reducion in is procylicaliy. Among naions ha had procyclical policies in he pas, bu which seem o have behaved quie counercyclically in he recen episode, mos of Lain America wih he glaring excepion of Venezuela sands ou, as do he hree counries from he middle Eas in our sample Iran, Kuwai and Saudi Arabia and New Zealand and Norway among advanced economies. The paper is organized as follows. In he nex secion we review wha he heoreical lieraure has o say abou he cyclical behavior of fiscal policy. Then we specify he commodiy price index and he precise definiion of a boom. Having idenified he boom episodes, in he following secion we describe he behavior of fiscal and macro variables during imes of high prices. Then, in secion V, we carry ou he economeric esimaion of he elasiciies of fiscal variables wih respec o he commodiy price index. In ha secion we ackle he quesion of wheher fiscal behavior was differen in a saisically significan way across boom episodes. Secion VI hen analyzes he role of a few insiuional and poliical variables in rying o explain he changed paern of fiscal behavior. Secion VII concludes. 1. Wha heory predics In his secion we review wha he response of fiscal expendiure and he fiscal balance should be o shocks o governmen income as capured, for insance, by he increase in price of a naural resource owned by he governmen. We begin by sudying he opimal response of a single benevolen policymaker. We hen sudy he case of several policy makers ha inerac sraegically, giving rise o he "voraciy" effec. 2

11 1.1 The case of a single policymaker The governmen budge consrain Consider a governmen ha spends a real flow g, financed eiher by collecing revenue τ, enjoying he benefis of a posiive income shock ε, or decumulaing asses whose sock is denominaed by b and which pay a fixed rae of ineres rae r. The corresponding governmen budge consrain is b & = rb + τ + ε g, (1) where b & can be inerpreed as he fiscal surplus or defici a ime. Any such governmen mus also impose he sandard no Ponzi game condiion ha he discouned value of governmen asses be zero a infiniy: limbe r = 0. (2) Using his expression, flow consrain 1 can be solved forward and wrien as ( ) r( s ) r( s ) gse d = b + τs + εs e d, (3) so ha he presen value of expendiures is equal o he curren sock of asses plus he presen value of governmen income. Assume nex ha revenue is fixed ( τ = τ for all ) and ha he governmen income shock has a rae of decay equal o ρ : e ρ ( s ) ε = ε. s This holds for imes s>. Noice ha he shock is permanen if ρ =0, and he lengh of he shock goes o zero as ρ. A naural way o hink abou his seup is o assume ha his governmen is going along wih revenue τ unil unexpecedly a ime is experiences he posiive shock ε, whose dynamics is given by 4. This shock can be inerpreed as an increase in commodiy prices, which ranslaes ino higher income for he governmen. Incorporaing hese wo assumpion ino he governmen budge consrain 3 yields ( ) r s g e d = b s τ ε + + r r + ρ τ I is naural o assume ha b + >0, so ha he governmen has posiive wealh before he r posiive income shock akes place Governmen preferences and opimal policy Now suppose he governmen has he following preferences over he flow of governmen expendiure: σ 1 σ σ δ ( s ) U = g s e d σ 1 (4) (5) (6) 3

12 where σ is he ineremporal elasiciy of subsiuion and δ he insananeous rae of discoun. The soluion o he governmens sandard problem of maximizing 6 subjec o o 5 is summarized by he Euler equaion g& = gσ r ( δ) which implies g = ge σ δ s ( r )( s ) Using his in he governmen budge consrain 5 finally yields τ ε g = ( 1 σ ) r+ σδ b + +. r r+ ρ (9) I follows ha each momen in ime he governmen opimally spends a fixed share 1 σ r + σδ of is wealh, given by he sock of bonds i holds plus he presen value of is ( ) revenue The effecs of shocks I follows from 9 ha ε g ε r + ρ = ε g τ ε b + + r r + ρ (10) Tha is, he opimal elasiciy of governmen expendiure wih respec o he income shock is τ posiive and smaller (larger) han one if b + is larger (smaller) han zero. Since we have r τ assumed b + >0, he resuling elasiciy is smaller han one: if he income shock increases r by x %, expendiure should opimally rise by less han x %. Recall now from 3 ha he governmen surplus is he difference beween income and oal expendiure. Using 9 in 3 we have ( r ) fiscalsurplus = b& τ σ δ + ρ = σ ( r δ) b + + ε. r r+ ρ Noice ha if he rae of ineres is equal o he rae of discoun, his simplifies o & ρ = ε. r + ρ b This expression is equal o zero if ρ =0: when he shock is permanen no accumulaion or decumulaion of asses should ake place. We are finally ready o ask wha is he effec of an income shock on he fiscal balance: ( r ) b& σ δ + ρ =. ε r + ρ (7) (8) (11) (12) (13) 4

13 This expression is posiive if +. Tha is, if for a given rae of ineres, he elasiciy r ρσ 1 > δ of ineremporal subsiuion in governmen spending is sufficienly low ( is large), he shock is sufficienly emporary (he rae of decay ρ is large), and he rae of discoun δ is small. This is inuiive: if he governmens preference for smoohing is srong, he shock is no going o las oo long and he fuure is no discouned oo heavily, hen he governmen should opimally shif some of he curren income o he fuure; i accomplishes ha by running a larger fiscal surplus and accumulaing asses. 1.2 Many policymakers and he voraciy effec The fiscal policy problem wih many groups If he general case is ha fiscal policy should be counercyclical in response o shocks ha are sufficienly emporary, under wha condiions can i urn pro-cyclical? One common explanaion is ha in bad imes governmens paricularly in emerging markes are crediconsrained. When imes improve such consrains are presumably lifed, and governmens are free o go on a deb-financed spending spree. This sory has is appeal among oher reasons because inernaional capial flows are also procyclical, as borrowing consrains are relaxed during booms. This fac is documened, among ohers, by Gavin, Hausmann, Peroi and Talvi (1996), Kaminsky, Reinhar, and Vegh (2005), Mendoza and Terrones (2008), and Reinhar and Reinhar (2009). Bu borrowing consrains ha do no bind in good imes are no sufficien in hemselves o explain fiscal procylicaliy. The fac ha a governmen can borrow during a boom does no mean ha he governmen will find i desirable o borrow during a boom. For ha o be he case, an addiional explanaion is necessary. One possibiliy is he " voraciy effec" presened in Lane and Tornell (1996) and Tornell and Lane (1999), based on he model by Tornell and Velasco (1991). 5 If fiscal policy is decided on a decenralized basis, wih many ineres groups vying for heir share of he fiscal spoils, sandard smoohing behavior breaks down, and groups spend oo large a share of emporary posiive income shocks ha is, hey save oo lile during booms. The poliical economy plausibly unfolds differenly under differen poliical arrangemens or insiuions. A basic predicion of he " voraciy approach" is ha poliical sysems in which power is diffused among a number of agens will produce a higher degree of fiscal procyclicaliy relaive o a cenralized or uniary sysem. This is wha Sein e al (1999) and Lane (2003) find, using differen counry samples and varying measures of power dispersion. Conversely, Arezki and Brückner (2010) show ha commodiy price booms lead o increased governmen spending, exernal deb and defaul risk in auocracies, bu have smaller such effecs in democracies. 6 Suppose, as in Velasco (1999), ha here isn a single policymaker bu n of hem, indexed by i, each of whom ges benefis from public expendiure accruing o he policymakers consiuency. In his case budge consrain 1 becomes 1 σ 5 6 See also Velasco (1998) and (2003) for applicaions of ha model o a fiscal framework. Anoher poliical economy sory ha yields fiscal procyclicaliy is ha of Alesina e al (2008), who focus on a poliical agency problem: voers face corrup governmens ha can appropriae par of ax revenues for unproducive public consumpion. This agency problem ineracs wih lack of informaion: voers observe he sae of he economy, bu hey canno observe governmen borrowing. Hence, when voers see he economy booming, hey demand higher uiliy for hemselves in he form of lower axes or beer public goods. This forces he governmen o impar a procyclical bias o fiscal policy, and o borrow oo much. 5

14 b& = rb + τ + ε g, i i=1 n (14) Suppose nex ha each group i maximizes σ 1 σ σ δ ( s ) Ui = g is e d σ 1, (15) subjec o 14 and o he spending rule used by all oher groups, given by g i τ ε = φ b + +, r r+ ρ (16) where φ is a coefficien o be deermined. Using 16 in 14 we have b& τ ε = r φ( n 1) b + τ + ε φ( n 1 ) + gi, r r+ ρ The Euler equaion corresponding o his problem is ( ) g& = gσ r φ n 1 δ, which implies ( 1) ( ) r n s g = ge σ φ δ. s (19) Solving 14 forward, imposing 4, he no Ponzi game condiion 2 and symmery across all n groups yields r( s ) τ ε n gse d = b + +. r r + ρ Plugging 19 in 20 we have g ( 1 ) r+ + ( n 1) σ σδ σφ τ ε n r r+ ρ (21) i = b + + Now, combining 16 and 21 o solve for φ yields φ = ( 1 σ ) r + n σ ( n 1) σδ (17) (18) (20), (22) so ha again each group spends a fixed porion of governmen resources. I follows ha τ ε g = ngi = η ( 1 σ ) r + σδ b + + r r+ ρ (23) n where η = >1 n σ n 1 ( ) collapses o expression 9 in he earlier secion. is increasing in n. Noice ha when n =1, η =1 and his soluion 6

15 Noice from his soluion ha he larger he number of groups, he more each decides o spend. The inuiiion is ha wih more groups, he larger is he share of curren wealh he ohers can spend, and herefore he more each group wishes o spend in response The effecs of shocks Applying 23 in 14 we have ( 1 ) τ r ρ η r σ σδ fiscalbalance = b& + = b r η ( 1 σ ) r σδ ε , r r+ ρ We are finally ready o ask wha is he effec of an income shock on he fiscal balance: ( 1 ) b& r+ ρ η r σ σδ = +. ε r + ρ This expression is decreasing in η and posiive if η < r ( 1 σ ) (24) (25) r + ρ. In words, as n + σδ increases so does η, and as a resul he response of he fiscal balance o a shock is reduced. If here are many groups and herefore η is sufficienly large, hen he response can have a negaive sign: he surplus shrinks (or he defici becomes larger) as he shock increases and governmen income rises. This is how he voraciy effec can make fiscal policy pro-cyclical, even hough in he absence of power fragmenaion i ough o be counercyclical. 2. Commodiy prices and heir behavior The firs ask is o documen he behavior of he commodiies relevan for each of he economies we sudy. Table 1 shows he wo mos imporan commodiies in each of 48 counries, measured as he average shares of primary commodiy producion in naional oupu for he period No all counries in his sample qualify as commodiy republics: he oupu share of he four mos imporan commodiies ranges from a low of 0,51% in Belgium o a high of 52,64% in Kuwai. The average is 16% over he period , suggesing ha commodiies are indeed quie imporan in mos of he counries in he sample. Moreover, he average share of primary commodiies in oal producion has reached almos 28% in recen years for hese counries. In urn, Table 2 shows he share of hese same commodiies in oal expors of hese 48 naions. Here commodiies play a more imporan role: he average share is 46,3%, and only in a handful of advanced economies (Ausria, France, Germany, Ialy, Porugal, Spain and he UK), plus China, is he commodiy expor share 10% or less. In wha follows we remove hese 8 counries from he sample, remove also anoher 8 counries due o daa availabiliy, and focus on he remaining 32, which can indeed be labeled commodiy republics. To idenify periods of commodiy booms, we consruc for each counry a commodiy price index ha includes he commodiies produced domesically. The commodiy price indices ofen used in he lieraure are Laspeyres-syle indices based on Grilli & Yang's (1988) mehodology and exended by Pfaffenzeller e al. (2007), which use a fixed baske of commodiy weighs for each counry. This mehod has he advanage of being comparable across ime: since weighs are fixed over he lengh of he series, he composiion of he index does no change and movemens in he series can be direcly inerpreed as movemens in he price of hose commodiies. 7

16 The disadvanage of such a mehodology, however, is precisely ha he weighs remain consan over ime and hus do no capure changes in he commodiy producion marix. This problem is especially pronounced when considering long hisorical samples, and is one of he reasons ha papers in he lieraure have addressed relaively shor ime periods (e.g. Blaman, Hwang and Williamson (2007); Cashin, Céspedes and Sahay (2004)). To demonsrae he firs-order imporance of his limiaion, consider he case of Chile. During he firs half of he wenieh cenury, commodiy producion was dominaed by salpeer. When a synheic alernaive was discovered in he 1930s, world prices dropped suddenly and producion was gradually phased ou. By 1950, Chile no longer produced salpeer a all, and copper began o dominae commodiy producion. A commodiy price index consruced using weighs fixed in recen years as has been used in he lieraure would be a compleely inappropriae measure of prices for he firs half of he 20h cenury. An alernaive o his approach is o employ a Passche-syle index in which weighs are updaed in each period. The disadvanages of such a procedure are wo: comparabiliy over ime is more difficul, and he index will reflec changes in producion quaniies ha migh no be compleely exogenous o domesic policy over shor ime periods. In conras o previous lieraure, we consruc he weighs for each commodiy in he final index using he value of ha commodiy in oal commodiy producion of he counry. This sraegy allows us o cover represenaively a longer period. Since our aim is o examine he evoluion of fiscal policy during exogenous commodiy booms across counries and over an exended hisorical period ( ), we employ a mehodology ha is a compromise beween he fixed-weighs Laspeyres index employed in he lieraure and a Paasche index described above. To allow for srucural shifs in he producion marix, we recalculae weighs in 30-year inervals, and splice he series using he rescale facor obained by aking he raio in overlapping periods. The choice of 30-year inervals is admiedly ad-hoc, bu is convenien due o he availabiliy of cerain producion and price daa series. The commodiy price index for counry i is compued as follows: p j i j kcombi = sk j j p, k where j j j p q s k = is commodiy j 's share of oal commodiy producion in 30 k j j p q j j counry i, averaged over he 30-year base period beginning in year k = {1960,1990}; p is j he average price of commodiy j over he period of ; p is he inernaional price j of commodiy j a ime in US dollars; and q is he oupu of commodiy j during year in he unis of he corresponding price. We employ producion daa from Michell's World Hisorical Saisics volumes, he U.N. Food and Agriculure Organizaion, and naional agencies. Price series repored in he daabase provided by Pfaffenzeller e al. (2007) have been exended using informaion from he U.S. Geological Service, he World Bank's Global Economic Monior, and he B.P. Saisical Review of World Energy. The final index is hen consruced by splicing he COMBI index across base years: COMBI i = k = COMBI k 30+ k i for k = 1990 and 1990 i COMBI i COMBI i k COMBI for k = 1960 and k k

17 i The indices are hen normalized such ha COMBI = for all i. Finally, he index is deflaed using he producer price index for he Unied Saes. A commodiy boom is defined as an episode during which he index reaches a level of a leas 25% above is rend. The rend is compued using a cenered moving average wih a 50 year window. Each episode begins in he firs year in which he index surpasses he rend, and ends in he year prior o he index reurning below he rend. This algorihm produces he same characerizaion for mos of he counries: in he period , 26 counries ou of 32 experienced wo commodiy booms: one saring in he 70s and running all he way o 1984 or so (exac daes vary somewha from counry o counry) and one saring around 2004 ha runs all he way o As can be seen in Table 3, Cosa Rica, he Dominican Republic, Honduras, Jamaica, Nicaragua and Paraguay experienced only one commodiy boom (in he 1970s) and none in recen years. And only New Zealand experienced hree: he 1970s episode is spli ino wo (71-74 and 77-84). This characerizaion of commodiy booms provides a sharp esing ground for he hypohesis of " his ime is differen" wih regard o fiscal policy in commodiy republics. Since mos counries in he sample experienced wo booms one hree decades ago and one recenly one can naurally compare behavior around boh episodes o see wheher fiscal policy indeed changed. Tha is precisely he course we follow in laer secions of his paper. Table 3 also shows some sylized facs regarding he behavior of commodiy prices around he boom episodes. The firs hing o noice is ha he 1970s episode was long, covering a decade or more in some cases, wih he average episode lasing 11,7 years for our sample of counries. This is in conras o he recen episode, whose average duraion (wih 2008 as he cuoff poin) is 5,4 years. How sharp was he increase in commodiy prices in hese episodes? If we ake for each counry he average level of he index during he boom episode, and compare i wih he level of he index in he wo years prior o he beginning of he boom, we see in Table 4 ha he 1970s episode implied an average commodiy price increase of 59,9%, while he recen episode involved an increase of 59,6%. By his measure, he wo episodes are almos idenical. In Table 5 we provide an alernaive characerizaion of he boom periods. The curren boom episode is sill ongoing, and herefore we have no informaion on is oal duraion or is evenual undoing. To make he siuaion more symmeric across he wo boom episodes (1970s-80s versus curren), for he earlier case we define he boom episode as lasing from is beginning o is peak. In his case he average lengh of he earlier episode is reduced o 6,5 years, no oo differen from he 5,4 years of average duraion (so far) of he recen boom. Wha abou commodiy price increases under his alernaive characerizaion? Table 6 conains he relevan informaion. For he earlier episode he average increase in he index was 63,7%, no oo differen from he 59,6% increase in he recen boom. We conclude, herefore, ha regardless of he exac definiion used, he magniude of boh booms a leas as measured by he increase in he relevan commodiy prices is quie similar. In wha follows we adop he beginning-o-peak definiion of he earlier episode, which has he advanage of making boh booms also more comparable in erms of lengh. Bu appendix A conains he analysis using he alernaive definiion. As he ineresed reader can check, resuls are almos idenical wih eiher definiion. 9

18 3. The behavior of macro variables during commodiy price booms In his secion we characerize he behavior of fiscal variables and he real exchange rae around imes of commodiy booms. The characerizaion in his secion is descripive and informal. The nex secion conains an esimaion of he relevan cyclical elasiciies. Figure 1a shows he behavior of he fiscal balance around he commodiy price booms. We display he average fiscal defici or surplus during counry i boom episode, as a share of GDP, minus he average fiscal balance over he 2 years prior o he episode. The resul is sriking: during he 1970s boom, fiscal balances improved on average only 0,2 percenage poins of GDP. In conras, during he recen episode hey improved on average by 3,6 percenage poins of GDP. In figure 1b we show he change in fiscal balance for hose counries ha have wo episodes in our sample. In paricular, we compare he average fiscal balance in he mos recen commodiy boom episode for counry j wih he average fiscal balance in a pas episode. The picure ha emerges is clear. For mos of he counries, during he mos recen episode he fiscal balance improved wih respec o he pas episode. Of course, here is subsanial cross-naional heerogeneiy. There are he counries such as Ghana, where he defici widened during boh commodiy price booms. This is perhaps an example of he voraciy hypohesis a work, wih demands on he fiscal sysem inensifying during periods of abundance. Graned, he deerioraion in Ghana s fiscal performance is much less in he recen boom (1.0 percenage poins of GDP) han in he earlier boom (5.8 percenage poins of GDP), bu he persisenly negaive sign is remarkable. Then here are counries were, regardless of saring poin, performance deerioraed across he wo boom episodes. A sriking example is Venezuela, where in he 1970s he boom brough an increase in he fiscal surplus equal o 3,7 percenage poins of GDP, while recenly he dramaic increase in he price of oil only caused he fiscal defici o shrink by 0,6 percenage poins of GDP, from -0,7% o -0,1%. There are also a number of counries where fiscal performance improved markedly from he 70s o he firs decade of he 21s cenury. One such case is Chile, where a reducion in he defici of only 1,9 percenage poins of GDP four decades ago changed ino an increase in he surplus of 6,4 percenage poins of GDP during he recen boom. Somehing similar, bu even more dramaic, occurred in oil-producing Kuwai and Saudi Arabia. In his laer case, he recen boom brough an increase in he fiscal surplus of 20,7 percenage poins of GDP, far above he 3,1 percenage poin increase in he 1970s. An ineresing case is ha of Argenina, a naion no usually associaed wih pruden fiscal managemen. Argenina s performance improved a grea deal across episodes. In he 1970s he fiscal defici acually deerioraed by 2.4 percenage poins of GDP, while his ime around he defici shrank by an impressive 8.2 poins. Recall, however, ha a deep financial crisis ook place righ before he onse of he laer episode. This ended o amplify he change in he fiscal surplus. More generally, wha explains he changing behavior of he fiscal balance across episodes? Apparenly no he behavior of revenues. Figure 2a shows wha happened o revenues in he 1970s and recenly. There are almos no differences in he averages. Governmen revenue increased by 3,2 percenage poins in he early episode and by 3,1 percenage poins his ime around. Needless o say, again here is a fair bi of variaion around he averages (see Figure 2b). In a number of counries revenues were broadly sable or even fell in he 1970s, while hey increased subsanially in he recen episode. Among he counries showing such an improvemen are Argenina, Bolivia, Ghana, Perú and Souh Africa. 10

19 Where we do find an imporan difference across booms is in he behavior of governmen spending, shown in Figure 3a. In he 1970s, counries, on average, fully spen he windfall: real expendiure rose by 3,2 percenage poins of GDP, he same increase as in revenues. In conras, in he recen episode spending fell on average by 0,5 percenage poins of GDP. Counries where spending as a share of oupu was eiher sable or fell in he recen episode are Argenina, Bolivia, Chile, Guaemala, Indonesia, India, Kuwai, Mexico, Malaysia, Nigeria, Norway, Peru, Russia and Saudi Arabia (see Figure 3b). This is quie remarkable, given ha in every single one of hose counries he price of he commodiies i produces increased sharply. 7 Las in his secion, consider he behavior of he real exchange rae during he wo boom episodes. This is an imporan variable in he conex of commodiy price flucuaions, since governmens reasonably fear he onse of Duch disease as he improvemen in he erms of rade causes he real exchange rae o appreciae, poenially creaing rouble for noncommodiy exporers. As Figure 4 shows, his concern was amply borne ou in he episode of he 1970s. The real exchange appreciaed by 9,3%. In he more recen episode, by conras, he real exchange rae again appreciaed, bu only by 5,9%. I seems plausible o conjecure ha he more moderae pace of expansion in governmen spending in he laer episode may have conribued o he smaller loss in compeiiveness. Remarkably, he real exchange rae acually depreciaed in a few counries during he recen episode: Argenina, Bolivia, Ecuador, Kuwai, Mexico, Malaysia and Venezuela. In Chile, Cameroon, India, Norway, Trinidad & Tobago and Uruguay i appreciaed by less han 5%, in spie of sharp increases in commodiy prices. In conras, in oher naions he real exchange rae appreciaed sharply (more han 10%) during he recen boom episode: Ausralia, Brazil, Canada, Colombia, Indonesia, New Zealand, Nigeria, Russia and Souh Africa. In shor, hese figures do sugges ha somehing seems o have been differen his ime around in erms of he conduc of fiscal policy in imes of commodiy booms. Bu while suggesive, he analysis hus far has limiaions. Averages are ineresing, bu hey do hide subsanial heerogeneiy in individual experiences. More imporanly, individual performances have o be condiioned on he acual change in commodiy prices affecing each counry o be reliably revealing. Tha is precisely wha we do in he secion ha follows. 4. The cyclical behavior of fiscal policy across commodiy boom episodes In order o obain measures of he cyclicaliy of fiscal policy variables we esimae counry-bycounry regressions of he form: ( log ) = ( log ) d Fi αi + βid I + εi, where I i is he commodiy price index for counry i a ime, F i is a fiscal variable in counry i a ime, and he coefficien β is our index of cyclicaliy for his paricular variable: i measures he elasiciy of index. In our esimaions, i i i F wih respec o he respecive commodiy price F sands for eiher real fiscal revenues or real fiscal expendiures. In he case of fiscal expendiures, a posiive value of β i implies procyclical behavior. 7 Of course, in hese counries governmen spending rose, bu i did so more slowly han oupu. 11

20 For he case of he fiscal balance, we run he regression B i i i ( Ii ) ε i = α + β d log +, where B i is he fiscal balance measured as a percenage of GDP. In his case, β i mus be inerpreed as a semi-elasiciy. A negaive value suggess pro-cyclicaliy of he fiscal balance wih respec o commodiy prices. 8 In conras o wha happens when cyclicaliy is esimaed wih respec o oupu, as is done in much of he lieraure, here here are no issues of endogeneiy, since he prices of commodiies are clearly exogenous o he conduc of domesic fiscal policy. This is he same approach o measuring cyclicaliy adoped by Arreaza e al (1999), Sorensen e al (2001) and Lane (2003). We esimae he above equaion by ordinary leas squares, wih a correcion for firs-order serial correlaion in he error erm. We run each regression wice for each counry. Firs, using daa from he years 1965 o 1985, o obain he relevan elasiciy corresponding o he firs boom episode. Second, using daa from he years 1995 o 2008, we do he same in he case of he second boom episode. We hen compare he resuling elasiciies o check wheher he cyclical behavior of hese variables changed from one boom episode o he nex. 9 Figure 5 summarizes he resuls of hese regressions, which are conained in Table A in he appendix. Consider firs he cyclical behavior of he fiscal balance. As Figure 5A shows, he relevan (semi-) elasiciies are much larger in he recen episode han earlier, boh for developed and developing economies. In he earlier episode here is suggesive evidence of procyclicaliy. Of he 32 esimaed semi-elasiciies, 8 are negaive. 10 This means ha when commodiy prices increased, in hose counries he fiscal balance acually deerioraed. Of he remaining posiive values, mos are very close o zero, and none exceeds Tha means ha if he commodiy price index of a counry increased by 1%, in no counry would he fiscal balance increase by more han 0.15 percenage poins of GDP. The average semi-elasiciy is jus 0.03, suggesing a very small improvemen in he fiscal posiion as a resul of he commodiy price boom. Moreover, only 7 of he 32 esimaed elasiciies are saisically significan a he 10% level or beer. This also suggess a week relaionship beween he fiscal balance and movemens in commodiy prices. The siuaion was differen during he recen episode of commodiy affluence. The elasiciy of he fiscal balance rises from 0.03 in he 1970s o 0.10 more recenly. The increase is paricularly large (of a leas 0.10) in Brazil, Kuwai, Nigeria, Norway, Saudi Arabia and Trinidad & Tobago. Only 3 of he coefficiens are negaive, and all of hem are quie close o zero, suggesing very lile prevalence of pro-cyclical fiscal balances. And in his case, 17 of he esimaed semi-elasiciies are saisically significan a leas a he 10% level. Wha could cause his paern of behavior of he fiscal balance? Begin wih revenues, whose behavior across episodes is also summarized in Figure 5B. On average, he revenue elasiciy for he early episode is 0.2, so ha a 10% increase in commodiy prices induces a 2% increase in governmen revenues. Somewha surprisingly, here are 8 counries wih a negaive elasiciy, suggesing a fall in revenues a he ime of he commodiy boom. Noice As discussed by Sorensen e al. (2001), since he surplus hovers around zero, i is no necessary o regress he growh rae of he fiscal balance. In some cases, due o daa availabiliy we esimae hese relaionships using a shorer sample period. We also include in he analysis counries ha only experienced a commodiy boom episode in he firs period ( ). We presen he deails of he esimaion in he appendix. 12

21 also ha 14 ou of he 31 elasiciies are significan a he 10% level or beer, suggesing a fairly igh associaion beween revenues and commodiy prices. The paern of behavior of revenues changed in he recen episode. Revenues become more responsive o he commodiy cycle, as can be seen in Figure 5B. Now he average revenue elasiciy is 0.46 (up from 0.20), reflecing perhaps higher ax raes on commodiy producion and/or improved ax collecion and enforcemen, wih he coefficiens for 17 counries being saisically significan. The increase in he elasiciy is especially large (changes of over 0.2) in Brazil, Cameroon, Colombia, Ghana, Mexico, Nigeria, Norway, New Zealand, Russia, Saudi Arabia, Trinidad, Venezuela and Souh Africa. Paricularly large elasiciies appear in he case of Ghana, Saudi Arabia and Venezuela, wih coefficiens larger han one ha sugges a more han proporional increase in revenues in response o an increase in commodiy prices. Across episodes here is also change in he cyclical behavior of expendiures, as can be seen in panel C of figure 5. In he early episode he behavior of expendiures in he firs episode is only loosely linked o commodiy prices. The average expendiure elasiciy is 0.08: a 10% increase in commodiy prices induces jus a 0.8% increase in governmen expendiures. For developed counries he average elasiciy is negaive, which is slighly puzzling. Considering boh groups of counries, only 4 of he 28 esimaed elasiciies are saisically significan. An especially large propensiy o spend is presen in he early years only in Kuwai (1.15), where expendiure is seen o have gone up more han proporionaely o he increase in commodiy prices. Things change on he expendiure side during he recen episode. The average elasiciy is now 0.11 up slighly from he earlier episode, even hough i remains negaive for developed counries as a group and in spie of sharp reducions in he elasiciies for some individual developing counries. Counries wih paricularly large drops (changes of over 0.2 in he relevan elasiciy) are Argenina, Chile, Ecuador, Guaemala, Iran, Kuwai and Nigeria. Trinidad & Tobago is righ behind, wih a drop of An oulier in he oher direcions is Venezuela, where he elasiciy during he recen boom is 0,47, implying a large increase in spending in response in commodiy prices. This represens an increase of 0.46 in he relevan elasiciy for Venezuela beween he wo commodiy boom episodes. Having said all of his, noe however ha in his esimaion only six of he individual elasiciies are saisically significan. To check he robusness of hese resuls, we also esimae he cyclicaliy of hese resuls using an alernaive specificaion, uilized by Gavin and Peroi (1997) and Alesina e al (2008). Consider he equaions: df df i = i + βici + γ ifi 1 α + ε i = i + βici + φiyi + γ ifi 1 α + ε i i where C i is he cyclical componen of he commodiy price index for counry i and Y i is he oupu gap for counry i a ime. In hese esimaions F i can sand for he fiscal balance, governmen expendiure or fiscal revenues, all as a share of GDP. By including he cyclical componene of he commodiy price index, raher han he commodiy price iself, we incorporae he ransiory elemens of he movemens in commodiy prices. Recall from our heoreical discussion above ha i is ransiory increases in revenue ha should give rise o fiscal savings. The cyclical componen of commodiy prices compued by applying an HP filer o he raw index. We esimae hem counry by counry, again using daa from he years 1965 o 1985 for he firs boom episode and daa from he years 1995 o 2008 for he second. The mehod of esimaion is again OLS. 13

22 Figure 6 summarizes he resuls of his esimaion, whose deails are conained in Table B in he appendix. They are broadly congruen wih he earlier se of resuls. To begin wih consider he equaion wih he fiscal balance on he LHS. As he panel A of Figure 6 shows clearly, he relevan sensiiviy o he cycle rises sharply accros episodes, boh for developed and developing naions. In he earlier episode we find 11 negaive coefficiens, suggesing srong procyclicaliy of he fiscal balance in hose counries. The average of he β coefficiens is almos zero (0.01). Moreover, only 4 of he esimaed coefficiens in he individual counry regressions urn ou o be significan a he 10% level or beer. In conras, for he recen episode he average of he β coefficiens is 0.10, and only 4 are negaive (and very near zero in absolue value). In his case, 19 of hem are significan a he 10% level or beer. As Table 9 shows, Argenina, Bolivia, Brazil, Chile, Cameroon, Colombia, Ecuador, Iran, Mexico, Nigeria, Norway, Russia, Saudi Arabia and Trinidad & Tobago are he counries showing larges increases almos he same group as in he earlier esimaion. We conduc a es for he saisical significance of he difference of he wo esimaed coefficiens. Table 9 shows ha 19 of he differences are saisically significan a he 1% level, 1 of hem a he 5% level, and 2 a he 10% level. The resuls hardly change when we run he second equaion, conrolling now for he oupu gap. For he early episode he average of he β coefficiens barely budges from 0.01 o 0.02, wih only 7 of he new coefficiens being significan. For he laer episode he average of he β coefficiens is he same ha in he previous esimaion, In his case, 18 of he esimaed coefficiens are significan a he 10% level or beer. Figure 7 summarizes he esimaes for he parameer showing he sensiiviy of fiscal variables wih respec o he oupu gap. Consider he behavior of he fiscal balance In he early episode he average of he φ coefficiens is jus 0.02, again very close o zero. And indeed, mos of he esimaed coefficiens for individual counries in Lain America (Argenina, Bolivia, Brazil, Chile, Colombia, Cosa Rica, Ecuador, Guaemala, Honduras, Mexico, Trinidad & Tobago and Venezuela) are negaive, suggesing ha he fiscal balance would deeriorae if oupu is above is naural rae. The siuaion changes significanly during he more recen episode. The average of he φ coefficiens moves up o In several of he counries where he coefficien was negaive in he early episode, i urns posiive in he laer episode. Nex, consider he same equaions bu now esimaed wih governmen spending as a share of GDP on he LHS. Summary resuls can be found in he boom panels of figures 6 and 7. The resuls are very similar regardless of wheher we conrol for he oupu gap. The average coefficien is zero or slighly larger in he firs commodiy boom episode, suggesing ha as GDP rose so did real governmen expendiure, and in abou he same percenage. By conras, in he recen boom episode he average coefficien is negaive (in boh equaions, conrolling and no for he oupu gap). Eigh of he individual esimaes are saisically significan a he 10% level or beer. This is suggesive of a igher spending sance in he commodiy boom of he 2000s. This resul is consisen wih he one obained by Frankel e al (2011). For revenues, a summary of he esimaes appears in he middle panels of figures 6 and 7. Again, he esimaes are similar regardless of wheher care is aken o conrol for he oupu gap. The sensiiviy o he commodiy cycle rises sharply across episodes, especially for developing counries jus as i happenned under he alernaive specificaion and he qualiy of he esimaes also rises. By conras, very few of he esimaes for he oupu gap coeffcien are saisically significan, regardless of he episode considered. The esimaes are small in absolue value and for he recen episode hey are negaive on average for boh developed and developing counries, which is couner-inuiive. This suggess ha once he 14

23 effec of he commodiy cycle has been aken ino accoun, he oupu gap does no have a grea deal of power for explaining he behavior of governmen revenues across he cycle. The resuls of his secion can be summarized as follows. For he earlier episode, we do no find a very igh associaion beween he behavior of commodiy prices and ha of fiscal variables. Bu he presence of a number of negaive coefficiens in boh specificaions suggess he presence of procyclical fiscal balances in a number of counries in he 1970s and 1980s. The recen episode shows a differen paern. Hardly any of he coefficiens showing he response of he fiscal balance are negaive (regardless of specificaion), and many of he coefficiens increase sharply and become large and posiive for a number of counries. This is suggesive a much more counercyclical sance during he recen commodiy boom episode. This change is relaed o wha appears o have been a more resrained response of governmen expendiures, plus a more favorable reacion of revenues, during he recen boom. 5. Wha caused he change in fiscal behavior? In order o explain he cross-secion variaion of our cyclicaliy measures, we esimae differen versions of he following specificaion: βi = δ + λzi + εi, where β i corresponds o he cyclicaliy measures esimaed in he previous secion. The vecor Z i conains an index of insiuional qualiy, an index of exchange rae flexibiliy, a dummy ha akes value 1 if a fiscal rule was in place in he esimaion period (FR) and a dummy ha akes value of 1 if he counry under analysis is a significan oil producer and 0 oherwise. 11 The insiuional qualiy index corresponds o he EFW index ha measures insiuional qualiy in five major areas: (1) size of governmen, (2) legal srucure and securiy of propery righs, (3) access o sound money, (4) exchange wih foreigners, and (5) regulaion of capial, labor, and business. The exchange rae flexibiliy index is he one repored by Ilzezki, Reinhar and Rogoff (2008). A higher value for his index indicaes a more flexible exchange rae. The fiscal rule dummy is consruced from informaion repored by he IMF (Fiscal Rules Anchoring Expecaions for Susainable Public Finances). Oher hings equal, we would expec counries ha have implemened a fiscal rule o exhibi a more counercyclical fiscal performance. The resuls for he esimaion of he cross-secion regression are presened in Table 10. We use measures of fiscal ciclicaliy analogous o hose used by Gavin and Peroi (1997) and Alesina e al (2008). 12 In mos cases, he righ-hand variables are saisically significan in explaining he cyclicaliy of he fiscal balance. The insiuional qualiy index is posiively correlaed wih fiscal balance couner-cyclicaliy, suggesing ha counries wih higher insiuional qualiy have a more counercyclical fiscal policy, as prediced by our heoreical framework. Exchage rae flexibiliy is posiively correlaed wih fiscal balance couner-cyclicaliy, in a manner similar o We define significan oil producer as a counry for which he share of oil producion in oal producion is higher han 5%. Here -saisics are presened in parenheses. ***, **, * denoe significance a he 10, 5 and 10 percen levels respecively. 15

24 he resuls in Tornell and Velasco (2000). The dummy for oil producer is significan in he fiscal balance esimaion. The resuls for he deerminans of he cyclicaliy of governmen expendiures are similar o he ones for he case of he fiscal balance cyclicaliy. However, in his case he fiscal rule dummy is found o be a significan deerminan of fiscal cyclicaliy. 6. Conclusions Was his ime differen wih regard o he behavior of fiscal policy over he commodiy cycle? This paper provides an affirmaive answer o his quesion. Differen economeric esimaions sugges ha in many counries fiscal policy was eiher acyclical or decidedly pro-cyclical in he commodiy price boom of he 1970s and 1980s. Tha was no he case in he recen boom: in many counries paricularly in Lain America and he Middle Eas revenues seem o have risen srongly in andem wih he increase in commodiy prices, while expendiure was held in relaive check and even fell in a few cases. The resul was much larger increase in fiscal savings (or a leas a reducion in fiscal dissaving) during he commodiy boom ha ook place before he world financial crisis. Why did fiscal behavior change across episodes? This paper provides a preliminary answer o his imporan quesion. Our empirical resuls sugges he presence of fiscal rules also seems o have made a difference: counries ha use hem displayed a larger shif oward fiscal couner-cyclicaliy beween he wo episodes. The movemen in exchange rae regimes, mosly from fixed o flexible raes, also may have affeced he cyclical behavior of fiscal policy. One pending quesion is wha happenned o fiscal policy in hese counries since he end of he second commodiy boom. When he world financial crisis arrived, many of he naions sudied here pu in place sharply couner-cyclical fiscal policies. Tha was presumably one furher sep oward he kind of fiscal policy heory prescribes. Bu as he crisis receded and many emerging marke naions ook off on a pah of very fas growh, heory would also have prescribed a ighening of fiscal policy. Increasing spending or cuing axes is poliically easy; doing he opposie is poliically hard. Only when we learn and ha is a fascinaing subjec for fuure research ha naions ighened fiscal policy afer loosening i during he crisis, will we be able o claim vicory over he age-old problem of fiscal procylicaliy. 16

25 References [1] Alesina, A., F. Campane and G. Tabellini, 2008, Why is fiscal policy ofen procyclical?, Journal of he European Economic Associaion, Volume 6, Issue 5, pages , Sepember. [2] Arezki, Rabah, and Markus Brückner, 2010, Inernaional Commodiy Price Shocks, Democracy, and Exernal Deb, IMF Working Paper 10/53 (Inernaional Moneary Fund: Washingon, DC). [3] Arreaza, A., Sorensen, B.E., Yosha, O., 1999, Consumpion Smoohing Through Fiscal Policy in OECD and EU Counries, in: Poerba, J.M, von Hagen, J. (Eds) Fiscal Insiuions and Fiscal Performance. Universiy of Chicago Press, Chicago IL, [4] Barro, R.J., 1979, On he Deerminaion of he Public Deb, Journal of Poliical Economy 87, [5] Bayoumi, T., Eichengreen, B., 1995, Resraining Yourself: Fiscal Rules and Sabilizaion, Inernaional Moneary Fund Saff Papers 42, [6] Blaman, C., J. Hwang and J.G. Williamson, 2007, Winners and Losers in he Commodiy Loery: The Impac of Terms of Trade Growh and Volailiy in he Periphery , Journal of Developmen Economics 82, [7] Cashin, P, L.F. Céspedes and R. Sahay, 2004, Commodiy Currencies and he Real Exchange Rae, Journal of Developmen Economics 75(1), [8] Cuddingon, John, 1989, Commodiy Expor Booms in Developing Counries, World Bank Research Observer 4, [9] Faas, A., and I. Mihov, 2001, Governmen Size and Auomaic Sabilizers: Inernaional and Inranaional Evidence, Journal of Inernaional Economics 55, [10] Forbes, K., Rigobon, R., 1998, No Conagion, Only Inerdependence: Measuring Sock Marke Co-movemens, NBER Working Paper #7267. [11] Frankel, J., Vegh, C., and G. Vulein, 2011, On Graduaion from Procyclicaliy, mimeo, Universiy of Maryland. [12] Gali, J., 1994, Governmen Size and Macroeconomic Sabiliy, European Economic Review 38, [13] Gavin, M., Hausmann, R., Peroi, R. and E. Talvi, 1996, Managing Fiscal Policy in Lain America and he Caribbean: Volailiy, Procyclicaliy and Limied Crediworhiness, mimeo, Iner-American Developmen Bank. [14] Gavin, M. and R. Peroi, 1997, Fiscal Policy in Lain America, NBER Macroeconomics Annual 1997, 12, [15] Grilli, E.R. and M.C. Yang, 1988, Primary Commodiy Prices, Manufacured Goods Prices, and he Terms of Trade of Developing Counries: Wha he Long Run Shows, World Bank Economic Review 2(1): [16] Hercowiz, Z., and M. Srawczynski, 1999, Cyclical Bias in Governmen Spending: Evidence from he OECD, mimeo, Tel Aviv Universiy. [17] Ilzezki E., Reinhar, C. M. and K. S. Rogoff, 2008, Exchange Rae Arrangemens Enering he 21s Cenury: Which Anchor Will Hold?, mimeo, Harvard Universiy. [18] Kaminsky, Graciela, Carmen Reinhar, and Carlos Vegh, 2005, When I Rains, I Pours: Procyclical Capial Flows and Macroeconomic Policies, NBER Macroeconomics Annual 2004, Vol. 19, pages

26 [19] Lane, P.R., 1998, On he Cyclicaliy of Irish Fiscal Policy, Economic and Social Review 29, [20] Lane, P. R., 2003, The Cyclical Behaviour of Fiscal Policy: Evidence from he OECD, Journal of Public Economics 87(12), pages , December. [21] Lane, P. R. and A. Tornell, 1996, Power, Growh and he Voraciy Effec, Journal of Economic Growh 1, [22] Lane, P. R. and A. Tornell, 1998, Why Aren Lain American Savings Raes Procyclical? Journal of Developmen Economics 57, [23] Mendoza, E. and M. Terrones, 2008, An Anaomy of Credi Booms: Evidence from Macro Aggregaes and Micro Daa, NBER Working Paper # [24] Pfaffenzeller, S., P. Newbold and A. Rayner, 2007, A Shor Noe on Updaing he Grilli and Yang Commodiy Price Index, World Bank Economic Review 21(1): [25] Reinhar, C. and V. Reinhar, 2009, Capial Flows Bonanzas: An Encompassing View of he Pas and Presen, in Jeffrey Frankel and Francesco Giavazzi, eds. NBER Inernaional Seminar in Macroeconomics Chicago: Chicago Universiy Press. [26] Sinno, Emily, 2009, Commodiy Prices and Fiscal Policy in Lain America and he Caribbean, mimeo, World Bank. [27] Sorensen, B., Wu, L., Yosha, O., 2001, Oupu Flucuaions and Fiscal policy: U.S. sae and local governmens , European Economic Review 45, [28] Sein, E., Talvi, E., Grisani, A., 1999, Insiuional Arrangemens and Fiscal Performance: The Lain American Experience, in Poerba, J.M., von Hagen, J. (eds.) Fiscal Insiuions and Fiscal Performance. Universiy of Chicago Press, Chicago IL, [29] Talvi, Erneso, and Carlos Vegh, 2005, Tax Base Variabiliy and Procyclicaliy of Fiscal Policy, Journal of Developmen Economics 78, no. 1, [30] Tornell, A. and P. R. Lane, 1998, Are Windfalls a Curse? A Non-represenaive Agen Model of he Curren Accoun, Journal of Inernaional Economics 44, [31] Tornell, A., and P. R. Lane, 1999, The voraciy effec, American Economic Review 89, [32] Tornell, A. and A. Velasco, 1992, Why Does Capial Flow from Poor o Rich Counries? The Tragedy of he Commons and Economic Growh, Journal of Poliical Economy, Vol. 100, December. [33] Tornell, A. and A. Velasco, 2000, Fixed versus Flexible Exchange Raes: Which Provides More Fiscal Discipline? Journal of Moneary Economics. [34] Velasco, A., 2000, Debs and Deficis under Fragmened Fiscal Policymaking, Journal of Public Economics. [35] Velasco, A., 1999, A Model of Endogenous Fiscal Deficis and Delayed Fiscal Reforms, in J. Poerba and J. Von Hagen (eds.), Fiscal Insiuions and Economic Performance, Universiy of Chicago Press for he NBER. 18

27 Table 1: Principal commodiy producion and share of primary commodiies in oal producion Counry Comm 1 Comm 2 Comm 1 Comm 2 Toal Argenina crudeoil beef 3,88 3,83 15,04 Ausralia hardcoal beef 2,29 1,24 6,39 Ausria beef whea 0,27 0,11 0,66 Belgium beef whea 0,33 0,11 0,51 Bolivia nagas crudeoil 11,49 6,01 27,38 Brazil beef sawnwood 2,81 2,09 9,13 Cameroon crudeoil bananas 9,46 3,36 17,63 Canada sawnwood nagas 4,82 3,03 13,34 Chile copper sawnwood 7,40 4,39 13,85 China rice hardcoal 5,71 4,89 17,16 Colombia crudeoil beef 6,28 2,37 12,95 Cosa Rica bananas coffee 7,75 2,40 12,48 Cuba sugar crudeoil 2,95 1,25 5,65 Denmark crudeoil whea 1,61 0,47 2,53 Dominican Republic beef bananas 1,31 1,19 3,80 Ecuador crudeoil bananas 20,12 13,07 37,29 France whea beef 0,42 0,30 0,90 Germany beef whea 0,19 0,17 0,65 Ghana gold aluminum 8,81 3,03 14,88 Guaemala coffee bananas 3,06 2,38 9,19 Hungary whea maize 1,53 1,23 4,52 India rice gold 7,96 7,27 21,18 Indonesia rice crudeoil 7,24 6,65 20,34 Iran crudeoil nagas 30,92 6,50 40,08 Ialy beef nagas 0,25 0,16 0,71 Jamaica bauxie bananas 4,83 0,75 6,90 Kuwai crudeoil nagas 49,78 2,85 52,64 Malawi obacco maize 17,76 9,58 38,06 Malaysia crudeoil nagas 8,18 5,77 21,32 Mexico crudeoil nagas 6,26 0,93 8,65 Neherlands nagas beef 2,47 0,33 2,97 New Zealand beef nagas 2,61 1,04 4,58 Nicaragua beef coffee 5,88 4,22 15,59 Nigeria crudeoil nagas 40,51 2,93 47,23 Norway crudeoil nagas 14,06 3,88 19,20 Paraguay soybeans beef 10,98 8,82 23,12 Peru crudeoil copper 2,03 1,36 4,92 Poland hardcoal whea 2,37 1,05 5,17 Porugal beef maize 0,24 0,07 0,42 Romania nagas crudeoil 4,64 2,90 13,38 Russia nagas crudeoil 19,52 17,27 41,91 Saudi Arabia crudeoil nagas 45,34 3,63 49,29 Souh Africa hardcoal gold 4,03 3,56 10,56 Spain beef whea 0,24 0,14 0,62 Trinidad & Tobago nagas crudeoil 24,59 15,14 40,12 Unied Kingdom crudeoil nagas 1,33 0,75 2,56 Uruguay beef rice 7,29 1,52 9,69 Venezuela crudeoil nagas 31,83 3,58 38,67 Average 15,95 19

28 Table 2: Principal commodiy expors and share of primary commodiies in oal expors Counry Comm 1 Comm 2 Comm 1 Comm 2 Toal Argenina crudeoil soymeal 13,74 9,12 57,00 Ausralia crudeoil aluminium 9,80 7,06 56,00 Ausria aluminium crudeoil 1,39 1,12 6,00 Belgium crudeoil aluminium 5,65 0,68 11,00 Bolivia nagas soymeal 13,78 11,70 65,00 Brazil iron soybeans 5,94 4,50 36,00 Cameroon sawnwood cocoa 50,78 12,14 92,00 Canada crudeoil nagas 5,92 5,57 22,00 Chile copper sawnwood 38,28 3,08 55,00 China crudeoil hardcoal 1,41 1,05 6,00 Colombia crudeoil hardcoal 29,57 8,62 56,00 Cosa Rica bananas coffee 10,10 4,12 20,00 Cuba ni sugar 29,95 29,82 64,00 Denmark beef aluminium 5,16 0,45 15,00 Dominican Republic crudeoil sugar 18,32 7,81 37,00 Ecuador crudeoil bananas 41,63 18,83 75,00 France crudeoil whea 1,29 0,68 6,00 Germany crudeoil aluminium 0,90 0,79 5,00 Ghana gold cocoa 26,20 25,46 74,00 Guaemala coffee sugar 16,10 8,67 44,00 India crudeoil shrimp 3,97 1,76 16,00 Indonesia crudeoil nagas 12,04 10,16 40,00 Iran crudeoil nagas 85,80 1,06 88,00 Ialy crudeoil aluminium 1,82 0,64 6,00 Jamaica aluminium sugar 60,66 6,28 73,00 Kuwai crudeoil nagas 94,00 87,33 92,90 Malawi sugar ea 12,77 8,86 27,00 Malaysia crudeoil nagas 5,66 3,55 17,00 Mexico crudeoil copper 9,08 0,36 11,00 Neherlands crudeoil nagas 6,21 0,88 13,00 Norway crudeoil nagas 47,25 11,90 70,00 New Zealand beef aluminium 5,28 3,36 32,00 Nicaragua coffee beef 19,26 10,68 60,00 Paraguay soybeans soymeal 36,11 7,64 78,00 Peru gold copper 19,32 15,11 69,00 Poland hardcoal copper 2,99 1,83 10,00 Porugal crudeoil aluminium 1,72 0,63 5,00 Romania crudeoil sawnwood 5,75 3,12 14,00 Russia crudeoil nagas 33,43 15,56 61,00 Saudi Arabia crudeoil ni 89,60 0,09 90,50 Souh Africa hardcoal crudeoil 6,17 4,28 21,00 Spain crudeoil aluminium 2,50 0,67 8,00 Trinidad & Tobago crudeoil nagas 47,06 13,39 62,00 Unied Kingdom crudeoil nagas 7,00 0,74 10,00 Uruguay logs crudeoil 12,40 7,14 39,00 Venezuela crudeoil aluminium 81,52 3,31 87,00 Toal corresponds o he sum of he shares of all commodiies expors in oal expors. 20

29 Table 3: Commodiy boom episodes Episode Counry Sar End Duraion ARG1973 Argenina ARG2004 Argenina AUS1972 Ausralia AUS2004 Ausralia BOL1973 Bolivia BOL2003 Bolivia BRA1973 Brazil BRA2004 Brazil CAN1974 Canada CAN2003 Canada CHL1966 Chile CHL2004 Chile CMR1974 Cameroon CMR2004 Cameroon COL1973 Colombia COL2004 Colombia CRI1976 Cosa Rica DOM1972 Dominican Republic ECU1974 Ecuador ECU2004 Ecuador GHA1973 Ghana GHA2004 Ghana GTM1973 Guaemala GTM2004 Guaemala HON1973 Honduras IDN1974 Indonesia IDN2003 Indonesia IND1973 India IND2004 India IRN1973 Iran IRN2004 Iran JAM1972 Jamaica KWT1973 Kuwai KWT2004 Kuwai MEX1973 Mexico MEX2004 Mexico MYS1973 Malaysia MYS2003 Malaysia NGA1973 Nigeria NGA2004 Nigeria NIC1973 Nicaragua NOR1974 Norway NOR2003 Norway NZL1971 New Zealand NZL1977 New Zealand NZL2003 New Zealand PER1974 Peru PER2004 Peru PRY1971 Paraguay RUS1973 Russia RUS2003 Russia SAU1973 Saudi Arabia SAU2003 Saudi Arabia TTO1973 Trinidad & Tobago TTO2003 Trinidad & Tobago URY1968 Uruguay URY1977 Uruguay VEN1974 Venezuela VEN2003 Venezuela ZAF1973 Souh Africa ZAF2004 Souh Africa Average duraion episodes before ,7 Average duraion episodes afer ,4 21

30 Table 4: Commodiy price index around commodiy boom episodes (2000=100) Average value Before During Afer % Increase % Fall ARG1973 Argenina 77,1 100,8 77,9 30,7% -22,7% ARG2004 Argenina 100,7 150,5 49,5% AUS1972 Ausralia 81,3 116,3 89,8 43,0% -22,8% AUS2004 Ausralia 118,9 150,1 26,2% BOL1973 Bolivia 62,2 106,7 81,6 71,6% -23,5% BOL2003 Bolivia 94,7 144,0 52,1% BRA1973 Brazil 130,6 165,7 129,1 26,9% -22,0% BRA2004 Brazil 107,3 145,7 35,7% CAN1974 Canada 50,0 86,0 67,7 72,1% -21,2% CAN2003 Canada 92,0 143,8 56,3% CHL1966 Chile 107,1 133,4 104,0 24,6% -22,0% CHL2004 Chile 96,8 167,9 73,5% CMR1974 Cameroon 74,0 146,2 98,1 97,5% -32,9% CMR2004 Cameroon 94,9 165,8 74,8% COL1973 Colombia 80,9 130,3 100,9 61,2% -22,6% COL2004 Colombia 97,0 160,4 65,4% CRI1976 Cosa Rica 173,8 191,6 138,6 10,3% -27,7% DOM1972 Dominican Republic 170,4 247,5 144,8 45,2% -41,5% ECU1974 Ecuador 69,2 131,2 88,4 89,4% -32,6% ECU2004 Ecuador 95,3 167,6 76,0% GHA1973 Ghana 112,8 174,9 146,2 55,1% -16,4% GHA2004 Ghana 110,9 160,5 44,7% GTM1973 Guaemala 144,0 188,6 134,8 31,0% -28,5% GTM2004 Guaemala 93,7 145,6 55,4% HON1973 Honduras 157,2 173,5 129,8 10,3% -25,2% IDN1974 Indonesia 46,5 108,5 72,6 133,5% -33,1% IDN2003 Indonesia 91,8 148,8 62,0% IND1973 India 88,6 159,8 121,6 80,4% -23,9% IND2004 India 105,7 156,4 48,0% IRN1973 Iran 29,8 107,8 69,4 261,6% -35,6% IRN2004 Iran 96,5 167,5 73,5% JAM1972 Jamaica 179,7 212,0 143,9 18,0% -32,1% KWT1973 Kuwai 28,8 114,6 73,6 298,0% -35,8% KWT2004 Kuwai 94,7 173,1 82,8% MEX1973 Mexico 51,1 114,8 77,7 124,4% -32,3% MEX2004 Mexico 96,5 165,9 72,0% MYS1973 Malaysia 41,0 98,2 68,3 139,3% -30,4% MYS2003 Malaysia 91,2 148,5 62,8% NGA1973 Nigeria 39,7 114,5 75,1 188,6% -34,4% NGA2004 Nigeria 95,3 171,1 79,6% NIC1973 Nicaragua 186,9 222,2 149,9 18,9% -32,6% NOR1974 Norway 53,6 113,6 84,5 111,9% -25,6% NOR2003 Norway 89,9 154,0 71,3% NZL1971 New Zealand 70,8 94,8 59,1 34,0% -37,7% NZL1977 New Zealand 59,1 104,3 87,5 76,6% -16,1% NZL2003 New Zealand 97,5 136,7 40,2% PER1974 Peru 71,0 133,6 90,9 88,0% -32,0% PER2004 Peru 95,7 167,2 74,7% PRY1971 Paraguay 147,6 170,8 133,6 15,7% -21,8% RUS1973 Russia 37,0 86,9 65,0 135,0% -25,3% RUS2003 Russia 92,7 147,6 59,2% SAU1973 Saudi Arabia 28,4 112,7 72,3 296,6% -35,9% SAU2003 Saudi Arabia 95,1 157,7 65,9% TTO1973 Trinidad & Tobago 23,0 82,2 55,7 256,9% -32,3% TTO2003 Trinidad & Tobago 92,3 147,7 60,1% URY1968 Uruguay 135,0 170,5 98,8 26,3% -42,1% URY1977 Uruguay 98,8 163,1 113,3 65,0% -30,5% VEN1974 Venezuela 37,3 121,3 73,8 224,9% -39,2% VEN2003 Venezuela 95,7 155,9 63,0% ZAF1973 Souh Africa 91,2 154,6 129,6 69,5% -16,1% ZAF2004 Souh Africa 107,1 153,3 43,1% Episodes before ,7 138,7 98,5 59,9% -29,0% Episodes afer ,7 155,9 59,6% 22

31 Table 5: Commodiy boom episodes* Episode Counry Sar Max Years from sar o max ARG1973 Argenina ARG2004 Argenina AUS1972 Ausralia AUS2004 Ausralia BOL1973 Bolivia BOL2003 Bolivia BRA1973 Brazil BRA2004 Brazil CAN1974 Canada CAN2003 Canada CHL1966 Chile CHL2004 Chile CMR1974 Cameroon CMR2004 Cameroon COL1973 Colombia COL2004 Colombia CRI1976 Cosa Rica DOM1972 Dominican Republic ECU1974 Ecuador ECU2004 Ecuador GHA1973 Ghana GHA2004 Ghana GTM1973 Guaemala GTM2004 Guaemala HON1973 Honduras IDN1974 Indonesia IDN2003 Indonesia IND1973 India IND2004 India IRN1973 Iran IRN2004 Iran JAM1972 Jamaica KWT1973 Kuwai KWT2004 Kuwai MEX1973 Mexico MEX2004 Mexico MYS1973 Malaysia MYS2003 Malaysia NGA1973 Nigeria NGA2004 Nigeria NIC1973 Nicaragua NOR1974 Norway NOR2003 Norway NZL1971 New Zealand NZL1977 New Zealand NZL2003 New Zealand PER1974 Peru PER2004 Peru PRY1971 Paraguay RUS1973 Russia RUS2003 Russia SAU1973 Saudi Arabia SAU2003 Saudi Arabia TTO1973 Trinidad & Tobago TTO2003 Trinidad & Tobago URY1968 Uruguay URY1977 Uruguay VEN1974 Venezuela VEN2003 Venezuela ZAF1973 Souh Africa ZAF2004 Souh Africa Average duraion episodes before ,5 Average duraion episodes afer ,4 (*): Max corresponds o he year in which he commodiy price index reached is maximum value during episode. 23

32 Table 6: Commodiy price index around commodiy boom episodes* (2000=100) Average value Before Up o max % Increase ARG1973 Argenina 77,1 102,1 32,5% ARG2004 Argenina 100,7 150,5 49,5% AUS1972 Ausralia 81,3 119,1 46,5% AUS2004 Ausralia 118,9 150,1 26,2% BOL1973 Bolivia 62,2 105,1 69,1% BOL2003 Bolivia 94,7 144,0 52,1% BRA1973 Brazil 130,6 167,1 28,0% BRA2004 Brazil 107,3 145,7 35,7% CAN1974 Canada 50,0 85,1 70,3% CAN2003 Canada 92,0 143,8 56,3% CHL1966 Chile 107,1 134,7 25,8% CHL2004 Chile 96,8 167,9 73,5% CMR1974 Cameroon 74,0 139,6 88,6% CMR2004 Cameroon 94,9 165,8 74,8% COL1973 Colombia 80,9 132,8 64,2% COL2004 Colombia 97,0 160,4 65,4% CRI1976 Cosa Rica 173,8 222,2 27,9% DOM1972 Dominican Republic 170,4 282,7 65,9% ECU1974 Ecuador 69,2 123,8 78,7% ECU2004 Ecuador 95,3 167,6 76,0% GHA1973 Ghana 112,8 180,4 60,0% GHA2004 Ghana 110,9 160,5 44,7% GTM1973 Guaemala 144,0 199,6 38,6% GTM2004 Guaemala 93,7 145,6 55,4% HON1973 Honduras 157,2 182,7 16,2% IDN1974 Indonesia 46,5 109,9 136,5% IDN2003 Indonesia 91,8 148,8 62,0% IND1973 India 88,6 164,1 85,3% IND2004 India 105,7 156,4 48,0% IRN1973 Iran 29,8 97,2 226,1% IRN2004 Iran 96,5 167,5 73,5% JAM1972 Jamaica 179,7 247,3 37,6% KWT1973 Kuwai 28,8 93,6 224,9% KWT2004 Kuwai 94,7 173,1 82,8% MEX1973 Mexico 51,1 109,8 114,6% MEX2004 Mexico 96,5 165,9 72,0% MYS1973 Malaysia 41,0 92,1 124,3% MYS2003 Malaysia 91,2 148,5 62,8% NGA1973 Nigeria 39,7 97,8 146,5% NGA2004 Nigeria 95,3 171,1 79,6% NIC1973 Nicaragua 186,9 265,4 42,0% NOR1974 Norway 53,6 106,9 99,4% NOR2003 Norway 89,9 154,0 71,3% NZL1971 New Zealand 70,8 97,3 37,4% NZL1977 New Zealand 59,1 106,1 79,6% NZL2003 New Zealand 97,5 136,7 40,2% PER1974 Peru 71,0 139,5 96,3% PER2004 Peru 95,7 167,2 74,7% PRY1971 Paraguay 147,6 190,9 29,3% RUS1973 Russia 37,0 79,9 116,2% RUS2003 Russia 92,7 147,6 59,2% SAU1973 Saudi Arabia 28,4 100,5 253,5% SAU2003 Saudi Arabia 95,1 157,7 65,9% TTO1973 Trinidad & Tobago 23,0 73,3 218,3% TTO2003 Trinidad & Tobago 92,3 147,7 60,1% URY1968 Uruguay 135,0 170,5 26,3% URY1977 Uruguay 98,8 179,9 82,1% VEN1974 Venezuela 37,3 113,9 205,1% VEN2003 Venezuela 95,7 155,9 63,0% ZAF1973 Souh Africa 91,2 154,6 69,6% ZAF2004 Souh Africa 107,1 153,3 43,1% Episodes before ,7 141,9 63,7% Episodes afer ,7 155,9 59,6% (*): Up o max corresponds o he average value of he commodiy price index from he beggining of he episode unil is maximum value during he episode. 24

33 Table 9: Changes in Fiscal Balance Cyclicaliy wih respec o commodiy prices Elasiciy fiscal balance around episode 1 Elasiciy fiscal balance around episode 2 Difference Argenina -0,02 0,11 0,13 *** Ausralia 0,02-0,03-0,05 *** Bolivia -0,02 0,09 0,10 ** Brazil -0,09 0,08 0,17 *** Canada 0,03 0,03 0,00 Chile 0,10 0,21 0,11 *** Cameroon 0,01 0,07 0,06 *** Colombia -0,03 0,06 0,09 *** Ecuador -0,04 0,09 0,13 *** Ghana 0,00-0,03-0,03 * Guaemala 0,02 0,04 0,02 ** Indonesia 0,01 0,03 0,02 ** India 0,01-0,01-0,01 Iran 0,00 0,10 0,10 *** Mexico -0,04 0,06 0,10 *** Malaysia -0,01 0,03 0,04 Nigeria 0,06 0,32 0,26 *** Norway 0,01 0,21 0,19 *** New Zealand -0,01 0,00 0,01 Peru 0,09 0,07-0,02 Russia 0,01 0,15 0,15 *** Saudi Arabia -0,10 0,51 0,61 *** Trinidad & Tobago 0,06 0,15 0,08 *** Venezuela 0,10 0,12 0,02 Souh Africa 0,05-0,07-0,12 *** Average 0,01 0,10 0,09 Elasiciy corresponds o he value β of he regression (Fiscal Balance as % GDP)=α+β*(Cyclical componen commodiy price) (***);(**);(*) corresponds o rejecion of he null hypohesis of equal coefficiens a significance levels of 1%,5% and 10% respecively. 25

34 Table 10: Deerminans of fiscal cyclicaliy Dependen variable Fiscal balance cyclicaliy Governmen expendiure cyclicaliy Explanaory variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Insiuional qualiy 0,013 0,021 0,016 0,021 0,012-0,014-0,01-0,012 (1,30) (1,76)* (1,67)* (1,82)* (1,19) (-2,02)** (-1,44) (-1,83)* Fiscal rule 0,043-0,035 (1,42) (-1,87)* Oil producer 0,058 0,054 0,042 0,056 0,063 0,016 (2,18)** (2,48)** (1,76)* (2,58)** (2,35)** (1,04) Exchange rae flexibiliy 0,021-0,012 (2,12)** (-1,72)* R2 0, ,08 0,13 0,12 0,23 0,11 0,07 0,06 0,12 0,09 Number of observaions F es 1,68 3,08* 4,76** 3,99** 3,16** 4,77*** 3,43** 4,07** 3,49* 3,52** 2,58* Sample All Developing All All Developing All All All All All All Al regressions are esimaed using a consan. (***);(**);(*), significance levels a 1%,5% and 10% respecively. 26

35 0,25 0,20 0,15 0,10 0,05 0,00-0,05-0,10 Figure 1a: Fiscal balance around commodiy boom episodes (Average fiscal balance in commodiy boom episode i minus average fiscal balance in 2 years previous o he boom episode, % GDP) GHA JAM CAN MEX ARG CRI NOR AUS IND BRA PER HON NZL URY PRY BOL ECU DOM GTM RUS COL CMR IRN ZAF NGA CHL IDN SAU NIC VEN MYS TTO AUS GHA IRN NZL GTM ECU VEN CAN MYS BRA IDN ZAF MEX CMR COL IND PER NOR RUS CHL TTO NGA BOL ARG KWT SAU Episodes before 2000 Episodes afer 2000 Average episodes before 2000 (0.2%) Average episodes afer 2000 (3.6%) Figure 1b: Fiscal balance around commodiy boom episodes (Change in he change of fiscal balance beween counry episodes) 20% 15% 10% 5% 0% -5% Increase in fiscal balance in counry epidose afer 2000 minus increase in fiscal balance in counry episode before 2000 Average counry episodes (3.2%) 27

36 0,25 Figure 2a: Governmen revenues around commodiy boom episodes (Average governmen revenues in commodiy boom episode i minus average governmen revenues in 2 years previous o he boom episode, % GDP) 0,20 0,15 0,10 0,05 0,00-0,05-0,10 SAU TTO CHL IRN VEN IDN NGA RUS COL ARG CAN AUS NOR JAM ZAF URY NZL NIC MYS HON CMR IND GTM DOM MEX PER BOL BRA PRY CRI ECU GHA SAU KWT TTO BOL ARG IRN VEN CHL ZAF ECU NOR CMR PER IND GHA RUS COL BRA NGA IDN MEX NZL GTM MYS CAN AUS Episodes before 2000 Episodes afer 2000 Average episodes before 2000 (3.2%) Average episodes afer 2000 (3.1%) 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Figure 2b: Governmen revenues around commodiy boom episodes (Change in he change of governmen revenues beween counry episodes) Increase in governmen revenues in counry epidose afer 2000 minus increase in governmen revenues in counry episode before 2000 Average counry episodes (-0,7%) 28

37 0,20 Figure 3a: Governmen expendiures around commodiy boom episodes (Average governmen expendiures in commodiy boom episode i minus average governmen expendiures in 2 years previous o he boom episode, % GDP) 0,15 0,10 0,05 0,00-0,05-0,10 SAU KWT CHL IRN CAN ARG RUS AUS JAM IDN NGA VEN NOR BOL COL MEX TTO IND NZL GHA HON CRI PER DOM GTM BRA ZAF CMR PRY ECU URY NIC MYS IRN VEN GHA ECU ZAF NZL AUS TTO CMR BRA BOL IDN GTM COL MEX IND PER NOR CAN MYS RUS ARG CHL SAU NGA KWT Episodes before 2000 Episodes afer 2000 Average episodes before 2000 (3.2%) Average episodes afer 2000 (-0.5%) 10% Figure 3b: Governmen expendiure around commodiy boom episodes (Change in he change of governmen expendiure beween counry episodes) 5% 0% -5% -10% -15% -20% -25% SAU KWT CHL NGA ARG CAN RUS IDN NOR AUS COL BOL MEX IRN IND TTO PER NZL GTM VEN BRA NZL CMR GHA ZAF MYS ECU Increase in governmen expendiure in counry epidose afer 2000 minus increase in governmen expendiure in counry episode before 2000 Average counry episodes (-4.3%) 29

38 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Figure 4: Real effecive exchange rae around commodiy boom episodes (Change in real exchange rae in commodiy boom episodes) CHL PER PRY IND ZAF CAN BRA HON BOL COL VEN MYS URY NZL MEX AUS NOR GTM URY CRI NZL ARG KWT DOM TTO ECU CMR IDN IRN NGA SAU GHA BOL SAU MYS ARG PER MEX ECU KWT VEN NOR CMR TTO CHL IND GHA IRN GTM AUS NGA COL ZAF IDN RUS NZL CAN BRA Episodes before 2000 Episodes afer 2000 Average episodes before 2000 (9.3%) Average episodes afer 2000 (5,9%) 30

39 Figure 5: Cyclicaliy of fiscal variable o commodiy prices 0,12 A. Fiscal balance 0,10 0,08 0,06 0,04 0,02 0,00 All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,60 B. Governmen revenues 0,50 0,40 0,30 0,20 0,10 0,00 All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,16 0,14 0,12 0,10 0,08 0,06 0,04 0,02 0,00-0,02-0,04-0,06 C. Governmen expendiures All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer

40 Figure 6: Cyclicaliy of fiscal variable o commodiy prices 0,12 A. Fiscal balance 0,10 0,08 0,06 0,04 0,02 0,00 All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,09 0,08 0,07 0,06 0,05 0,04 0,03 0,02 0,01 0,00 B. Governmen revenues All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,03 0,02 0,01 0,00-0,01-0,02-0,03-0,04-0,05 C. Governmen expendiures All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer

41 Figure 7: Cyclicaliy of fiscal variable o oupu gap 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00-0,05 A. Fiscal balance All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,06 0,04 0,02 0,00-0,02-0,04-0,06-0,08-0,10-0,12 B. Governmen revenues All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer ,20 C. Governmen expendiures 0,10 0,00-0,10-0,20-0,30-0,40 All counries Developed Economies Developing Economies Episodes before 2000 Episodes afer

42 Table A: Cyclicaliy of fiscal variable o commodiy price index Elasiciy of fiscal variable o commodiy price index* Governmen expendiures Governmen revenues Fiscal balance Argenina ,07 0,29 0,03 Argenina ,24 0,14 0,06 Ausralia ,12-0,05 0,02 Ausralia ,19 *** -0,08 0,02 * Bolivia ,36 0,21 0,10 * Bolivia ,02 0,18 0,05 Brazil ,03-0,36-0,03 Brazil ,15 0,01 0,07 ** Canada ,04 0,20 ** 0,06 ** Canada ,01 0,14 ** 0,05 *** Chile ,13 0,41 0,10 * Chile ,12 ** 0,45 ** 0,11 ** Cameroon ,04-0,04 0,01 Cameroon ,40 0,63 *** 0,06 Colombia ,01-0,08-0,01 Colombia ,05 0,23 ** 0,05 *** Cosa Rica ,35 0,24-0,02 Dominican Republic ,31 *** 0,22 * 0,00 Ecuador ,27 0,33 0,00 Ecuador ,17 0,13 0,08 ** Ghana ,55-0,25 0,04 Ghana ,26 ** 1,04-0,08 Guaemala ,16 0,32 0,01 Guaemala ,07 0,19 0,02 Honduras ,02 0,31 ** 0,07 ** Indonesia ,19 0,37 ** 0,02 Indonesia ,27 0,45 ** 0,03 India ,20-0,24 *** 0,00 India ,12-0,06-0,05 Iran ,53 *** 0,69 *** 0,01 Iran ,03 0,80 *** 0,10 *** Jamaica ,07-0,09-0,05 Kuwai ,15 *** Kuwai ,05 0,68 *** 0,23 * Mexico ,07 0,05 0,01 Mexico ,03 0,26 *** 0,04 ** Malaysia ,08 0,18 ** 0,08 Malaysia ,18 *** 0,18 0,02 Nigeria ,40 0,89 *** 0,10 Nigeria ,19 1,21 *** 0,27 ** Nicaragua ,16 0,10 0,07 Norway ,03 0,04-0,01 Norway ,02 0,35 *** 0,17 *** New Zealand ,04-0,07-0,01 New Zealand ,08 0,20 *** 0,03 * Peru ,04 0,32 * 0,04 Peru ,01 0,36 * 0,08 * Paraguay ,10 0,04 0,02 Russia ,00 Russia ,00 0,49 *** 0,12 *** Saudi Arabia ,03 0,62 ** 0,11 Saudi Arabia ,06 1,63 *** 0,56 *** Trinidad & Tobago ,44 *** 0,61 *** 0,04 Trinidad & Tobago ,28 0,95 *** 0,21 *** Uruguay ,11 0,31 *** 0,05 * Venezuela ,01 0,54 *** 0,15 *** Venezuela ,47 * 1,06 *** 0,18 *** Souh Africa ,10 0,13 * 0,06 ** Souh Africa ,41 *** 0,40 * 0,00 Average episodes before ,08 0,20 0,03 Average episodes afer ,11 0,46 0,10 (*) corresponds o he value β of he regression (ln(fiscal variable))=α+β* (ln(commodiy price index)), where Fiscal variable corresponds o he levels of real governmen expendiue and real governmen revenues. In he case of he fiscal balance we run he regression (Fiscal balance(% GDP))=α+β* (ln(commodiy price index)). (***);(**);(*), significance levels a 1%,5% and 10% respecively. 34

43 Table B: Cyclicaliy of fiscal variable o commodiy price index Governmen expendiures Governmen revenues (a) (b) (a) (b) (a) Commodiy Commodiy Commodiy Commodiy Commodiy price price Oupu gap price price Oupu gap price Fiscal balance (b) Commodiy price Oupu gap Argenina ,12 *** 0,12 ** 0,00 0,09 * 0,11 * -0,17-0,02 0,00-0,10 Argenina ,06-0,05-0,12-0,01-0,01-0,01 0,11 0,12 *** 0,43 *** Ausralia ,01-0,01-0,53 ** 0,01 ** 0,01-0,04 0,02 0,01 0,34 ** Ausralia ,02-0,02 0,01-0,04 ** -0,05 ** 0,09-0,03-0,03-0,02 Bolivia ,04-0,05 0,05-0,02-0,01-0,15-0,02-0,01-0,09 Bolivia ,02 0,02-0,17 0,09 *** 0,10 *** 0,21 * 0,09 ** 0,11 *** 0,47 ** Brazil ,05-0,07 0,10-0,11-0,05-0,49-0,09-0,01-0,66 * Brazil ,08-0,05-0,14 0,01 0,02-0,06 0,08 ** 0,08 * 0,04 Canada ,03 0,06 * -0,56 ** 0,06 ** 0,07 ** -0,05 0,03 0,00 0,58 *** Canada ,04-0,03-0,19 0,01 0,02-0,05 0,03 0,02 0,35 Chile ,11-0,22 ** 0,35 * -0,03-0,04 0,04 0,10 0,18 ** -0,27 ** Chile ,09 ** -0,09 ** -0,17 0,09 *** 0,10 *** -0,08 0,21 *** 0,21 *** 0,01 Cameroon ,04 0,04 0,08 0,00-0,01-0,08 0,01 0,01-0,06 Cameroon ,01-0,01-0,13 0,06 *** 0,06 ** 0,03 0,07 ** 0,08 ** 0,22 Colombia ,03 0,00 0,29 ** 0,00-0,02 0,16-0,03-0,02-0,06 Colombia ,02-0,02-0,05 0,02 0,02-0,04 0,06 *** 0,06 *** -0,02 Cosa Rica ,02 0,00 0,08-0,01 0,02-0,09-0,05 0,00-0,24 Dominican Republic ,02 0,03-0,05 0,04 * 0,02 0,24 0,01-0,01 0,36 ** Ecuador ,01 0,02-0,03 0,00 0,00-0,04-0,04-0,04-0,19 Ecuador ,07 0,06 0,05 0,12 *** 0,13 *** -0,23 * 0,09 * 0,09 ** -0,21 Ghana ,07-0,08 0,06-0,07 * -0,08 0,03 0,00 0,00-0,01 Ghana ,07 * 0,08 * -0,09 0,02 0,06-0,50-0,03-0,02-0,18 Guaemala ,02-0,05 * 0,40 *** 0,03 * 0,00 0,22 * 0,02 0,06 ** -0,28 ** Guaemala ,04-0,06 ** 0,24 * -0,01-0,02 0,20 ** 0,04 * 0,05 * -0,04 Honduras ,05-0,04-0,02 0,01 0,04-0,13 0,09 * 0,14 ** -0,18 Indonesia ,03 0,03 0,03 0,04 * 0,03 0,20 0,01 0,00 0,33 Indonesia ,04 0,06 ** -0,14 * 0,06 *** 0,07 *** -0,01 0,03 * 0,01 0,14 ** India ,03-0,04-0,06-0,02-0,02-0,02 0,01 0,01 0,03 India ,01 0,02-0,06 0,00 0,01-0,06-0,01-0,01 0,02 Iran ,06 0,07 0,11 0,06 0,09 0,22 0,00 0,03 0,26 *** Iran ,02 0,01 0,43 0,12 ** 0,11 ** 0,45 0,10 ** 0,12 ** -0,30 Jamaica ,12 *** 0,12 ** 0,03 0,02 0,02 0,00-0,11 ** -0,10 * 0,00 Kuwai ,07 ** Kuwai ,19 ** -0,27 *** 0,10 0,14 0,21 ** -0,17 0,34 ** 0,47 *** -0,20 Mexico ,05 * 0,01 0,51 *** 0,03 * 0,02 0,04-0,04 0,00-0,44 *** Mexico ,02 0,02-0,35 *** 0,04 ** 0,04 ** -0,06 0,06 ** 0,03 0,29 *** Malaysia ,11 0,10 1,16 0,08 * 0,12 ** -0,51 * -0,01 0,03-0,51 Malaysia ,01 0,02-0,28 ** 0,00-0,04 0,22 0,03-0,04 * 0,41 *** Nigeria ,03 0,04-0,08 0,06 0,06 ** 0,20 *** 0,06 0,05 0,32 ** Nigeria ,09-0,06-0,87 0,18 0,24 ** -1,21 * 0,32 *** 0,32 *** 0,42 Nicaragua ,06 0,04-0,17 0,06 0,04-0,13 0,06 0,07 0,07 Norway ,03-0,03 0,00-0,02-0,01 0,04 0,01 0,01 0,34 Norway ,11 *** -0,08 *** -0,37 ** 0,08 *** 0,09 *** -0,13 0,21 *** 0,19 *** 0,14 New Zealand ,02-0,03-0,24-0,03-0,05 *** -0,37 *** -0,01-0,01 0,04 New Zealand ,01 0,01-0,18 ** 0,01 0,01 0,09 0,00 0,00 0,30 * Peru ,06-0,01-0,51 0,01 0,01 0,07 0,09 0,01 0,77 * Peru ,03-0,03 ** 0,04 0,04 ** 0,04 ** 0,04 0,07 *** 0,07 ** 0,00 Paraguay ,02-0,02 0,01-0,01-0,01 0,00 0,02 0,02-0,01 Russia ,10 0,10 0,01 Russia ,00 0,01-0,49 * 0,09 *** 0,05 0,15 0,15 ** 0,03 0,68 *** Saudi Arabia ,01-0,02 0,13-0,04 0,03 1,54 *** -0,10-0,19 0,61 Saudi Arabia ,16 *** -0,15 ** -0,52 0,41 *** 0,37 *** 0,81 0,51 *** 0,46 *** 1,06 Trinidad & Tobago ,06 0,04 0,38 ** 0,13 *** 0,13 *** -0,15 0,06 0,09 * -0,48 ** Trinidad & Tobago ,03 0,00-0,26 0,09 *** 0,09 ** -0,02 0,15 *** 0,11 *** 0,33 ** Uruguay ,01-0,01 0,11 0,02 0,01 0,05 0,04 0,05 0,19 Venezuela ,02 0,02 0,13 0,12 ** 0,12 ** -0,18 0,10 ** 0,11 ** -0,41 * Venezuela ,08 * 0,08 * -0,01 0,20 *** 0,21 *** -0,21 * 0,12 * 0,14 * -0,21 Souh Africa ,04-0,05 0,22-0,02 * -0,02 ** 0,08 0,05 ** 0,04 ** 0,25 Souh Africa ,05 *** 0,07 *** -0,21 *** -0,03-0,03 0,24 ** -0,07 * -0,12 *** 0,47 *** Average episodes before 2000 Average episodes afer ,01 0,00 0,06 0,02 0,02 0,02 0,01 0,02 0,02-0,02-0,02-0,15 0,07 0,07-0,01 0,10 0,10 0,18 (a) corresponds o he value β of he regression (Fiscal variable as % GDP)=α+β*(Cyclical componen commodiy price). (b) corresponds o values β and γ of he regression (Fiscal variable as % GDP)=α+β*(cyclical componen commodiy price)+γ*(oupu gap) (***);(**);(*), significance levels a 1%,5% and 10% respecively. 35

44 Commens on Andres Velasco s paper Was This Time Differen? Fiscal Policy in Commodiy Republics Choongsoo Kim 13 Velasco s paper makes a useful conribuion o he discussion on fiscal policy behaviour in commodiy-rich counries (or commodiy republics, as he auhor refers o hem). I consrucs a commodiy price index for a group of 50 economies during he period and analyzes he daa o see how fiscal policy behaviour has evolved over ime. I finds as a resul ha fiscal balances improved by 3.6% on average during he recen commodiy boom in he 2000s. This is in conras o he previous boom in he 1970s and early 1980s when he change was negligible. Graph 1 I hen explains ha fiscal policy for he counries concerned has become less procyclical due o he presence of fiscal rules ha limi excessive governmen expendiure and o he learning-by-doing effec from he previous boom. Alhough hese deerminans are idenified in a simple regression model, and robus analyical resuls are no obained (parly because of he small sample size and possible selecion bias 14 ), his explanaion sill gives us meaningful policy implicaions regarding fiscal cyclicaliy. Using he daa provided in his paper, we can draw a saisically significan relaionship beween he commodiy price elasiciy of fiscal balances and he share of commodiies in oal producion: sronger couner-cyclical responses were found in counries wih greaer Governor, The Bank of Korea. Only 32 of he 48 economies ha he auhor iniially sudied could be labelled as commodiy republics due o daa unavailabiliy as well as he low percenages of commodiy expors in heir oupu less han 10 per cen. The sample size was hen reduced furher o 26 as hese are he counries ha experienced boh commodiy booms in he 1970s and he 2000s. A selecion bias problem migh have arisen in doing so, negaively affecing he regression s robusness. 36

45 dependence on commodiies during he recen boom, in line wih he paper s conclusion his ime is differen. Graph 2 In fac, he number of emerging marke economies wih fiscal rules has increased markedly since he end of he 1990s, and sood a 33 in This reinforces he argumen ha he main deerminan of fiscal cyclicaliy change is he presence of fiscal rules. However, i is imporan o also keep in mind he sudies suggesing ha he presence of fiscal rules is no closely correlaed wih fiscal balance improvemen (Ossowski e al. (2010)). In his case, he dummy variable for fiscal rules used in he paper s regression model is no sufficien o reflec he qualiy of he fiscal rules, and oher variables such as he IMF s Index of Srengh of Fiscal Rules 16 migh well be added o improve he model s explanaory power. Oher issues such as a cross-secional risk-sharing problem could also be aken ino accoun when analyzing fiscal cyclicaliy. Counries wih greaer economic openness ha is, greaer vulnerabiliy o exernal shocks are said o have governmens wih huge amouns of expendiure due o heir risk-reducing role (Rodrik (1998)). The same logic can be applied o he case for commodiy republics. During a commodiy boom, increased capial inflows o commodiy republics lead o real exchange rae appreciaions, inensifying he imbalances beween commodiy-relaed indusries and oher exporing indusries including manufacuring. Poliical pressures from he negaively affeced indusries in consequence moun, which ends o increase expendiure o suppor such indusries. In addiion o his, marke srucural change could have some relaionship o his paper s findings. Inernaional commodiy markes migh have become more compeiive recenly, and if his is he case, he greaer compeiion would have reduced commodiy republics price seing power. Concerning fiscal policy in Korea, i has no adoped any explici fiscal rule. Neverheless, Korea has successfully mainained fiscal susainabiliy, wih a public deb raio currenly IMF Fiscal Rules Daabase, The Index of Srengh of Fiscal Rules published by he IMF is an indicaor ha numerically measures a fiscal rule s qualiy in consideraion of eigh dimensions including coverage, enforcemen, flexibiliy, supporing procedures, ec. The scores are weighed using a principal componen analysis o creae an index sandardized o have a zero mean and a sandard deviaion of one. 37

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