How to order
IMF Publications

Working Papers in full text
2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 All


Other research-related activities and publications of the IMF can be found at IMF Research

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile



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

Author/Editor: Arezki, Rabah | Ismail, Kareem
Authorized for Distribution: April 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,138KB)
Use the free Adobe Acrobat Reader to view this PDF file.
 
Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
Order a print copy
Series: Working Paper No. 10/94
Subject(s): Business cycles | Commodity price fluctuations | Economic models | Fiscal policy | Government expenditures | International trade | Natural resources | Oil exports | Oil producing countries | Political economy | Real effective exchange rates | Revenue mobilization
Author's keyword(s): Fiscal Asymmetry | International Trade | Dutch Disease | Exhaustible Resources
 
English  
    Published:   April 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010094   Pages:   33
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
Please address any questions about this title to publications@imf.org.