On Promoting Fiscal Discipline: The Role of Exchange Rate Regimes, Fiscal Rules and Institutions

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Fiscal Vulnerabilities in Commodity Exporting Countries and the Role of Fiscal Policy

“…To understand more precisely the evolution of the fiscal policy response to the recent shock, a countryspecific, time-varying measure of fiscal cyclicality is computed using the Local Gaussian Weighted Least Squares method (LGWLS). This method has been used by Aghion et al (2007), Guerguil et al 2017and Keita and Turcu (2018) and allows the government reaction to the business cycle to fluctuate over time and differ between good and bad times. 25 Despite gains achieved earlier, fiscal policy became more procyclical in the wake of the commodity downturn, signaling the need to adjust to the enduring negative shock.…”

“…A recent study of resource-rich countries finds that fiscal rules have not reduced the procyclicality of government expenditure in a statistically significant way (Bova et al, 2016). Fiscal rules alone are not enough to promote counter-cyclical fiscal policy and should be combined with better institutions (Keita and Turcu, 2018). Country experiences show that successful fiscal rules generally are flexible and easy to monitor, grounded on strong legal basis, tightly linked to fiscal sustainability objectives, and support countercyclical fiscal policy.…”

“…The method uses all the observations for each year and the closest observations to the year considered are given a greater weight. To compute each , , the method weights all observations prior to t by a half-Gaussian distribution centered at t. We followAghion et al (2007),Guerguil et al (2017) andKeita and Turcu (2018) and use a value of equal to 5.26 Van Doorn R., V. Suri, and S. Gooptu. 2010, find that a number of middle-income countries, in the aftermath of the global crisis, needed to undertake severe fiscal adjustment or face a more favorable economic outlook than forecaseted at the time.…”

“…We followKeita and Turcu (2018) and measure GDP volatility as the square of the cyclical component of real GDP from an HP (100) filter.…”