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

By Rabah Arezki, Kareem Ismail. Social Science Research Network, 2010

133 citations recorded by the source corpus.

This paper investigates the changes in expenditure policy in oil-exporting countries during boom–bust in commodity price cycles, and their implications for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shocks. This model leads to a decoupling between real exchange rate and commodity export price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-exporting countries over the period 1992 to 2009. Results are threefold. First, we find that changes in current spending have a stronger impact on 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 booms is more muted. This raises concerns on potential adverse consequences of this asymmetry on economic performance in oil-exporting countries.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/93f55e255dbaa2a996c43d66881940bb5beccca0

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

Citations in the corpus

A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile (2011, background): “There are several 29 Arezki and Ismail (2010) find that current government spending increases in boom times, but is downward-sticky.”
The Implications of Natural Resource Exports for Nonresource Trade (2016, unknown): “For example Arezki et al. (2015) find that news about giant oil discoveries have rapid effects on the current account, saving rate and investments.”
Flexible Fiscal Rules and Countercyclical Fiscal Policy (2016, background): “This is in line with the findings of a large body of literature that showed public investment spending to be largely procyclical: it expands during booms but falls during slumps (Arezki and Ismail, 2013; Blanchard and Giavazzi, 2004; Dessus and others, 2013).”
News Shocks in Open Economies: Evidence from Giant Oil Discoveries (2015, unknown): “8 See Pieschacón (2012) for an analysis of the effects of oil price shocks on oil exporters using a small open economy model with both tradeable and nontradeable produced goods.”