Boom-Bust Cycle, Asymmetrical Fiscal Response and the Dutch Disease

We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries.
Publication date: April 2010
ISBN: 9781451982718
$18.00
Add to Cart by clicking price of the language and format you'd like to purchase
Available Languages and Formats
English
Prices in red indicate formats that are not yet available but are forthcoming.
Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Exports and Imports , Economics- Macroeconomics , Fiscal Asymmetry , export value , reer , fiscal rules , oil export , Methodology for Collecting , Estimating , and Organizing Macroeconomic Data , Open Economy Macroeconomics , Macroeconomic Analyses of Economic Development , Nonrenewable Resources and Conservation: General

Summary