The Sources of Fiscal Fluctuations

IMF Working Papers, October 30, 2020

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This paper assesses the dynamic impact of global macroeconomic conditions, commodity price movements, shifts in portfolio preferences, and domestic shocks on fiscal outcomes—notably the budget deficit, its main components, and debt—across a wide range of countries.
Heterogeneity is investigated across the level of development and other structural characteristics.
Dynamics are explored via panel local projections; robustness is assessed via dynamic panel and system GMM regressions.
The estimates quantify the amount of fiscal risk generated by various factors and provide inputs for designing potential insurance mechanisms or state-contingent debt instruments to assist in smoothing fiscal fluctuations.

Primary techniques: panel local projections.
Robustness checks: dynamic panel regressions and system GMM regressions.
Fiscal outcomes analyzed: budget deficit, deficit components, and debt.
Heterogeneity dimensions: level of development and other structural characteristics.

For emerging markets (EM):
- Key determinants of fiscal outcomes include world growth, financial risk appetite, political events, and commodity export prices.
For advanced economies (AE):
- Domestic growth, commodity import prices, and banking crises appear to matter more.
The study highlights distinct channels through which global and domestic shocks transmit to fiscal balances in different country groups.

Quantified fiscal risk from identified factors can inform the design of:
- Insurance mechanisms.
- State-contingent debt instruments (e.g., GDP-indexed bonds or similar) aimed at smoothing fiscal fluctuations.
Understanding heterogeneity across country groups helps tailor fiscal risk management and debt instruments to country-specific exposures (commodity exporters vs. importers; EM vs. AE).