CMStatistics 2016: Start Registration
View Submission - CFE
A0389
Title: Commodity prices and fiscal policy design: Procyclical despite a rule Authors:  Leif Anders Thorsrud - Norges Bank (Norway)
Hilde Bjornland - BI Norwegian Business School (Norway) [presenting]
Abstract: The aim is to analyse if the adoption of a fiscal rule insulates the domestic economy from commodity price fluctuations in a resource-rich economy. To do so, we develop a time-varying Dynamic Factor Model, in which both the volatility of structural shocks and the systematic fiscal policy responses are allowed to change over time. We focus on a particular country, Norway, that is put forward as exemplary with its handling of resource wealth; income from the sale of petroleum is first saved in a sovereign wealth fund for then to be spent following a fiscal rule. We find that, contrary to common perception, fiscal policy has been more (not less) procyclical with commodity prices since the adoption of the rule. Fiscal policy has thereby exacerbated the commodity price fluctuations on the domestic economy. Still, compared to many other resource-rich economies practicing a more spend-as-you-go strategy the responses are modest, as also documented in our counterfactual analysis. From a policy point of view, the implications of our findings are therefore of general interest since they highlight strengths and weaknesses of fiscal rules adopted in resource rich countries.