Terms of Trade Shocks and Fiscal Cycles
The latest boom in commodity prices fueled concerns about fiscal policies in commodity-exporting countries, with many claiming that it triggered loose fiscal policy and left no funds for a rainy day. This paper examines the links between fiscal policy and terms-of-trade fluctuations using a sample of 74 countries, both developed and developing. It finds evidence that booms in the terms of trade do not necessarily lead to larger government surpluses in developing countries, particularly in emerging markets and especially during capital flow bonanzas. This is not the case in OECD countries, where fiscal policy is of an acyclical nature.
This paper was written for the Conference on Inflation in an Era of Relative Price Shocks, (Sydney, Australia), August 17-18, 2009 jointly hosted by the Reserve Bank of Australia and the Centre for Applied Macroeconomic Analysis (CAMA) (Australian National University, Canberra, Australia). I thank Renée Fry, Christopher Kent, Larry Schembri, and participants at the Conference in Sydney for helpful comments The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Graciela L Kaminsky, 2010. "Terms of Trade Shocks and Fiscal Cycles," RBA Annual Conference Volume, in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.