NBER WORKING PAPER SERIES WAS THIS TIME DIFFERENT? FISCAL POLICY IN COMMODITY REPUBLICS. Luis Felipe Céspedes Andrés Velasco

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1 NBER WORKING PAPER SERIES WAS THIS TIME DIFFERENT? FISCAL POLICY IN COMMODITY REPUBLICS Luis Felipe Céspedes Andrés Velasco Working Paper NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA December 2013 We are grateful to Yan Carriere, Juan Matamala and Sergio Salgado for excellent research assistantship and to Cristian Muñoz for data collection. We are also grateful to Luis Catao for sharing his data with us. We thank Guillermo Calvo, Choongsoo Kim, Harald Uhlig and three anonymous referees for very useful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications by Luis Felipe Céspedes and Andrés Velasco. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source.

2 Was This Time Different? Fiscal Policy in Commodity Republics Luis Felipe Céspedes and Andrés Velasco NBER Working Paper No December 2013 JEL No. E62,F21,F32,F41,H12,H6,H63 ABSTRACT We revisit the issue of fiscal procyclicality in commodity-rich nations commodity republics in the nomenclature of this paper. Since commodity prices are plausibly a main driver of fiscal policy outcomes in these countries, we focus on the behavior of fiscal variables across the commodity cycle, in contrast to behavior across the output cycle, which has been the main focus of earlier research on fiscal procyclicality. We present evidence of reduced fiscal policy procyclicality in a number of countries. Our empirical results suggest that improvements in institutional quality have led to a more countercyclical fiscal policy stance in a number of countries. The presence of fiscal rules also seems to have made a difference: countries that use them displayed a larger shift toward fiscal counter-cyclicality between the two episodes. Luis Felipe Céspedes School of Business Universidad Adolfo Ibañez lfcespedes@uai.cl Andrés Velasco Columbia University School of International and Public Affairs 420 West 118th Street New York, NY and Oxford University and also NBER avbranes@gmail.com

6 gt τ t εt bt r bt = rb t +τ t +ε t g t, bt t limbe rt t =0. t τ t = τ t

7 ρ ( s t) ε = ε. s ρ τ t t e ρ, σ δ g t = g t σ ( r δ) ( r )( s t) g = ge σ δ s t τ εt gt = ( 1 σ) r+ σδ bt + +. r r+ ρ

8 ( 1 σ) r + σδ εt gt εt r + ρ = ε t g τ ε t t bt + + r r + ρ τ bt + r τ b t + >0 r x% x% ( ) + ρ Fiscal surplus = b t = σ ( r δ) b t + τ t + σ r δ r r + ρ ε. t bt ρ = ε r + ρ t. ρ =0 b t = σ ( r δ ) + ρ. ε t r + ρ

9 r + ρσ 1 > δ 1 σ ρ δ

10 n i bt = rb t +τ +ε t g it, n i=1 i τ εt git = φ bt + +, r r+ ρ φ bt = r φ ( n 1 ) b +τ +ε φ n 1 t t t ( ) τ r + ε t g t = g t σ r φ ( n 1) δ, g r + ρ it,

11 ( 1) ( ) r n s t g = ge σ φ δ. s t n. g it ( 1 ) r+ + ( n 1) σ σδ σφ τ ε n + + r r+ ρ t = bt φ ( 1 σ) r + σδ φ = n σ ( n 1) τ εt gt = ngit = η ( 1 σ) r+ σδ bt + + r r+ ρ n η = >1 n n =1 η =1 n σ n 1 ( ) Fiscal balance = b t = b t + τ r η ( 1 σ )r +σδ r +ε r + ρ η r 1 σ t r + ρ ( ) +σδ,

12 b r + ρ η r t ( 1 σ ) +σδ =. ε t r + ρ r + ρ η η < n r ( 1 σ) + σδ η η

13 i

14 j i j p t kcombi t = sk j j p k j j j pt qt sk = j 30 k j j pt qt j i j p j j pt j t j qt j t

17 Iit i t F it i t βi F it F it βi B β it i

19 df it = α + β C + γ F 1 + ε i i it i it it dfit = α i + βicit + φityit + γ ifit 1 + ε it C it i Yit i t F it

20 β β β β

22 β i = δ + λz i + ε i βi

32 βδαβ

35 A. All countries 3.0% 2.0% 2.2% 1.0% 0.0% -1.0% -0.5% -2.0% -3.0% -1.8% Before -2.7% During Episodes before 2000 Episodes after 2000 B. Only countries with episodes in 1970s and 2000s booms 2.0% 1.0% 1.0% 0.0% -1.0% -2.0% -1.6% -1.3% -3.0% -4.0% Before -2.8% During Episodes before 2000 Episodes after 2000

36 A. All countries 35.0% 30.0% 29.0% 31.8% 25.0% 20.0% 20.8% 23.3% 15.0% 10.0% Before Episodes before 2000 Episodes after 2000 During B. Only countries with episodes in 1970s and 2000s booms 35.0% 30.0% 25.0% 22.9% 27.8% 26.0% 30.4% 20.0% 15.0% 10.0% Before Episodes before 2000 Episodes after 2000 During

37 A. All countries 35.0% 30.0% 25.0% 20.0% 15.0% 22.1% 29.5% 29.6% 26.3% 10.0% Before Episodes before 2000 Episodes after 2000 During B. Only countries with episodes in 1970s and 2000s booms 35.0% 30.0% 25.0% 20.0% 15.0% 23.8% 29.5% 29.1% 29.6% 10.0% Before Episodes before 2000 Episodes after 2000 During

38 ΔαβΔ αβδ

39 Δαβ

40 Δαβγ

41 βδαβδ αβδ

42 βδαβ βγδαβγ

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