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Policy Research Working Paper 10409

Public Disclosure Authorized

Fiscal Policy Volatility and Growth

in Emerging Markets and Developing Economies
Francisco Arroyo Marioli
Antonio Fatás
Garima Vasishtha
Public Disclosure Authorized
Public Disclosure Authorized

Development Economics
Prospects Group
April 2023
Policy Research Working Paper 0

Abstract
This paper studies the volatility of fiscal policy in a large of the cross-country variation in volatility. The existence of
sample of countries with a focus on emerging markets fiscal rules, a more liberalized capital account, and more
and developing economies and commodity exporters over flexible exchange rates are all associated with lower fiscal
1990–2021. The findings show that fiscal policy has been policy volatility. The paper also shows the negative mac-
more volatile in emerging markets and developing econ- roeconomic consequences of this additional volatility on
omies than in advanced economies, and in commodity economic growth, finding that, over a 30-year period, it can
exporters relative to non-commodity exporters over this explain 8 percent of the income gap between the emerging
period. The degree of commodity dependence, and insti- markets and developing economies and advanced econo-
tutional and policy variables can explain a large percentage mies in the sample.

This paper is a product of the Prospects Group, Development Economics. It is part of a larger effort by the World Bank to
provide open access to its research and make a contribution to development policy discussions around the world. Policy
Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted
at antonio.fatas@insead.edu; farroyomarioli@worldbank.org; gvasishtha@worldbank.org.

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.

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 Fiscal Policy Volatility and Growth in Emerging Markets and Developing
Economies

Francisco Arroyo Marioli, Antonio Fatás, and Garima Vasishtha∗

Key Words: Fiscal policy; volatility; growth; emerging markets; commodity exporters
JEL Classification: E62; H30; H5


Arroyo Marioli: World Bank, Prospects Group; farroyomarioli@worldbank.org. Fatás: INSEAD; CEPR;
antonio.Fatas@insead.edu. Vasishtha: World Bank, Prospects Group; gvasishtha@worldbank.org. The authors thank
Amat Adarov, Ayhan Kose, Carlos Arteta, Francesco Zanetti, Franz Ulrich Ruch, Franziska Ohnsorge, Jeffrey Frankel,
Joseph Mawejje, Philip Kenworthy, Samuel Hill, Sinem Kilic Celik and seminar participants at the World Bank for
insightful comments and suggestions on earlier versions of this paper. Lule Bahtiri provided excellent research
assistance. We gratefully acknowledge support from the World Bank PHRD Fund. The views expressed in this paper
are entirely those of the authors and should not be attributed to the World Bank, its Executive Directors, or the
countries they represent.
1. Introduction

The global economy has witnessed two large recessions in the past 15 years, requiring monetary
and fiscal policy makers to make use of all available tools to minimize the impact of these crises. It
is fair to say that fiscal policy has been asked to do more than in previous crises due to a
combination of some countries being close to or at the zero lower bound and the unique nature
of the pandemic-induced crisis which required support that monetary policy could not provide. As
a result, global debt levels and deficits have surged (Figure 1). The rise in government debt and the
narrowing of fiscal space in emerging markets and developing economies (EMDEs) since the
pandemic is of particular concern. Together with the wide swings in commodity prices seen in
recent years, these developments have reignited interest in the complex link between commodity
prices and fiscal policy (Figure 2).

In this context, designing optimal fiscal policies that support macroeconomic performance
becomes critical. The issue of optimal fiscal policy is obviously a complex one and there are several
aspects of fiscal policy that can be discussed in this context. First, fiscal policy needs to be
countercyclical to stabilize growth during downturns. Second, fiscal policy needs to be sustainable
through a stable and transparent long-term framework. And third, fiscal policy should not be an
additional source of volatility through changes in spending or taxes that are not an optimal
response to economic conditions. This paper focuses on the last of these dimensions of fiscal
policy, investigating the key drivers of fiscal volatility in EMDEs and understanding how a volatile
fiscal policy can worsen macroeconomic performance.

The importance of fiscal policy volatility for macroeconomic volatility and growth prospects has
been well documented (for example, Afonso and Furceri 2008; Fatás and Mihov 2003, 2007, 2013;
Fernandez-Villaverde et al. 2015).1 Institutional frameworks and political processes have been
found to be important determinants of fiscal policy volatility (for example, Fatás and Mihov 2003,
2013). Our paper makes a novel contribution to this literature by focusing on the determinants of
fiscal policy volatility for a large sample of EMDEs, particularly commodity exporters, and
examining how this volatility affects growth. This is important for the following reasons. First,
commodities are significant sources of export and fiscal revenues for nearly two-thirds of EMDEs
and three-quarters of low-income countries (LICs), and more than half of the world’s poor reside
in commodity-exporting EMDEs (World Bank 2018, 2022). Second, declines in commodity prices
can trigger procyclical cuts in public expenditures because of reduced revenues from commodity
production and exports. Conversely, rising commodity prices can lead to procyclical increases in
public spending. Fiscal policy, therefore, often amplifies the impact of commodity price cycles on
economic growth and reinforces the business cycle (Céspedes and Velasco 2014; Talvi and Végh
2005). Third, revenues derived from the resource sector are likely not only volatile but their size is

1 A closely related strand of literature finds that fiscal policy variability depresses growth mainly through its impact
on uncertainty (Aizenman and Marion 1999; Lensink, Bo and Sterken 1999). More generally, there are of course
many other dimensions of macroeconomic policy volatility that have been investigated in the literature. For
instance, monetary policy volatility can also have a contractionary effect on output, as demonstrated by Mumtaz
and Zanetti (2013).

1
also disproportionately large.2 Fourth, these revenues are prone to rent-seeking behavior and
suboptimal policies. Therefore, a persistent challenge for commodity-exporting EMDEs is how to
manage the impact of volatile resource revenues on macroeconomic and financial stability.3

Against this backdrop, this paper addresses the following questions. Is fiscal policy more volatile in
commodity exporters than in non-commodity exporters? What are the main drivers of fiscal policy
volatility in EMDEs? What is the relationship between fiscal policy volatility and economic growth
in EMDEs? To answer these questions, we also provide an update to the academic literature on
fiscal policy volatility and growth.

Our approach proceeds as follows. First, we construct country-specific measures of fiscal policy
volatility based on the variance of exogenous changes in fiscal policy stance using fiscal policy
reaction functions for every country in our sample. We then establish some stylized facts on fiscal
cyclicality and volatility for different country groups: advanced economies, EMDEs, commodity
exporters, and non-commodity exporters. Next, using cross-sectional regressions, we examine the
role of institutions, policy variables as well as other country-specific factors in driving fiscal
volatility. We then test the impact that fiscal volatility has on GDP volatility and per capita GDP
growth to draw some implications for the macroeconomic consequences of such volatility.

The paper presents the following main findings. First, fiscal policy tends to be more volatile in
EMDEs than in advanced economies, and in commodity exporters relative to non-commodity
exporters. These results hold for all four fiscal policy indicators used to capture fiscal volatility –
primary expenditure, revenue, government consumption, and primary balance-to-GDP. Moreover,
fiscal policy tends to be more volatile the larger the commodity sector, even when controlling for
income levels. Second, fiscal volatility has generally trended downwards in EMDEs and commodity
exporters over the last three decades, although the trend is less clear for some of the fiscal
indicators used. In particular, the period following the 2008-09 global financial crisis (GFC) and
before the COVID-19 pandemic witnessed a notable decline in fiscal volatility in these countries.

Third, institutional and policy variables account for more than half of the cross-country variation
in fiscal policy volatility, with more political constraints and better institutions being associated
with less volatile fiscal policy. Specifically, the existence of fiscal rules, a more liberalized capital
account, and more flexible exchange rates are all associated with lower fiscal policy volatility.
Fourth, we find that fiscal policy volatility amplifies business cycle fluctuations and is detrimental
to economic growth. Moreover, a significant fraction of the difference in GDP volatility between
advanced economies and EMDEs can be explained by differences in their fiscal volatility. Taken
together, our findings underscore the macroeconomic challenges faced by commodity-exporting

2
Oil exporters are generally more dependent on resource revenues than metal exporters are. On average, resource
revenues account for about 28 percent of total fiscal revenues in oil exporters, compared to just over 10 percent in
aluminum and copper exporters, and less than 4 percent in zinc and nickel exporters.
3
Terms-of-trade shocks arising from commodity price movements can account for as much as half of the variation in
economic activity in EMDEs (Di Pace, Juvenal, and Petrella 2020; Kose 2002).

3
EMDEs in the face of commodity price fluctuations and offer insights for policy makers on the
appropriate design of policies, institutional frameworks, and the impact of fiscal policy decisions.

The structure of the paper is as follows. Section 2 provides a review of the related literature.
Section 3 presents our empirical methodology and the data set and describes the construction of
our measure of fiscal policy volatility. Section 4 summarizes key stylized facts about fiscal policy
volatility for our sample of countries and analyzes the determinants of this volatility, including for
commodity exporters. Section 5 focuses on the macroeconomic effects of fiscal policy volatility.
Section 6 concludes by summarizing the main findings and the associated policy implications.

2. Literature review

Our paper is related to several strands of the literature. There is extensive literature on the
importance of volatility for economic growth (for example, Blatmann, Hwang, and Williamson
2007; Ramey and Ramey 1995; van der Ploeg and Poelhekke 2009, 2010).4 Most of this literature
shows that volatility can be harmful for economic growth, although the empirical estimates vary
substantially across countries. Volatility can have multiple sources and there is a strand of the
academic literature that has focused on the role of volatility of economic policy. Here, some studies
have examined the economic effects of exogenous changes in fiscal policy, showing that changes
in fiscal policy that are not related to the economic cycle can have significant effects on economic
activity (see, for example, Blanchard and Perotti 2002; Fatás and Mihov 2001). This means that
fiscal policy itself can be a source of economic volatility and be detrimental to economic growth.

This is the starting point of a third strand of the literature that looks at the potential growth effects
of fiscal policy volatility (Fatás and Mihov 2013). This literature not only documents the negative
relationship between fiscal policy volatility and economic growth but also explores the
determinants of fiscal policy volatility, particularly the role of institutional and political variables.
The fact that institutional and political variables can explain the behavior of fiscal policy connects
these papers to an older literature on the political business cycle (Persson 2001; Shi and Svensson
2006) and to the literature on the benefits of good budgetary processes and fiscal rules.5

We build on several of these strands of the literature while pushing it forward by focusing on a
large sample of EMDEs and commodity exporters, in particular. Several papers have documented
that EMDEs are different when it comes to fiscal policy. EMDEs are characterized by more
procyclical fiscal policies compared to advanced economies.6 This procyclicality of fiscal (and
monetary) policies in emerging market economies exacerbates the business cycle volatility in these
countries (Lane 2003a).

4
See Bakas, Chortareas, and Magkonis (2019) for a review of the literature.
5
On the merits of good budgetary processes and fiscal rules, see, for example, Eichengreen, Hausman, and von
Hagen (1999); Fatás et. al (2003); Frankel (2011); Lane (2003a); von Hagen and Harden (1995); and Wyplosz (2002).
6
This procyclicality is well documented. See, for example, Bergman and Hutchison (2018); Frankel, Végh, and Vuletin
(2013); Gavin and Perotti (1997); Ilzetzki and Végh (2008); Kaminsky, Reinhart, and Végh (2004); and Talvi and Végh
(2005).

4
For commodity exporters, there is also evidence that the inherent volatility of commodity prices
affects macroeconomic outcomes as well as the conduct of fiscal policy. Madrid-Aris and Villena
(2005) show that in the case of Chile, the price of copper has become the main driver of economic
performance as “the Chilean economy has become commoditized.” When it comes to fiscal policy
outcomes, Kaminsky (2010) finds that terms-of-trade booms do not necessarily lead to larger
government surpluses in developing countries, reflecting the procyclical nature of government
spending. Similarly, Medina (2010) and Villafuerte, Lopez-Murphy, and Ossowski (2010) document
that fiscal revenue and expenditure respond strongly to commodity prices in Latin America and
the Caribbean. Spatafora and Samake (2012) also show that commodity prices have a significant
impact on fiscal outcomes in developing countries. A related strand of the literature looks at the
effects of oil revenue volatility on economic growth in oil exporters (El-Anshasy, Mohaddes, and
Nugent 2015; Jarrett, Mohaddes, and Mohtadi 2019) as well as the impact of oil price shocks on
the non-oil sector’s growth in oil exporters (Wilson, Newiak, and Mati 2021). However, these
studies only cover either a limited set of countries or mainly oil exporters. In contrast, we take a
more comprehensive approach by looking at all types of commodity exporters—energy, metals,
and agriculture.

3. Methodology and data

We proceed by first isolating fiscal behavior from the economic cycle by estimating a GDP-
dependent fiscal policy reaction function for each country. We then construct our measure of
policy volatility using the country-specific residuals from this equation. The goal here is to study
the role of fiscal behavior beyond the typical economically-induced behavior.

3.1 Fiscal policy reaction function

We think of governments designing fiscal policy based on a fiscal policy reaction function
summarized by the following relationship:

𝐹𝑖𝑠𝑐𝑎𝑙 𝑃𝑜𝑙𝑖𝑐𝑦𝑡 = 𝛼 + 𝛽 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦𝑡 + 𝛾 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑡 + 𝜖𝑡 (1)

Where “Fiscal Policy” is a variable that captures the stance of fiscal policy. We use four alternative
measures of fiscal policy. Three of these correspond to different measures of the budgetary stance:
primary expenditures, revenues, and the primary budget balance. The fourth one is government
consumption (from the national accounts). By looking at government consumption separately we
seek to understand whether a particular component of expenditures matters more for our
analysis. Primary expenditures, revenues, and government consumption are all expressed in real
terms and measured as log differences. The primary budget balance is expressed as the annual
change of its ratio to GDP.

“Economic Activity” denotes the cyclical stance of the economy – typically represented in the
literature by the output gap, unemployment rate, or output growth. We use annual GDP growth
as the measure of the cycle. The alternatives – the output gap and the unemployment rate – are

5
more difficult to construct or measure accurately for diverse economies.7

𝛽 summarizes the cyclical behavior of fiscal policy and indicates whether fiscal policy is
countercyclical or procyclical. It is composed of both automatic stabilizers and the discretionary
response of governments to economic fluctuations.8 Fiscal policy can also depend on other
variables (“Controls”). For example, the level of indebtedness (a proxy for available fiscal space) or
external shocks might affect fiscal policy regardless of the state of the business cycle.

The residual, 𝜖, captures changes in fiscal policy that are unrelated to the business cycle or any of
the control variables. We can think of these decisions as being the result of political decisions (such
as changes in tax rates or spending associated with the political cycle) or errors in policy (such as
mismeasurement of the output gap).

Using the logic of equation (1), how do we think about optimal fiscal policy? There are two criteria
that can be included in this discussion. First, we expect fiscal policy to be countercyclical. This
means, for example, that the coefficient 𝛽 is negative when fiscal policy is measured by
expenditures, positive when measured by the budget balance, and positive and higher than one
when measured by revenues. Second, the uncertainty associated with the residual can be seen as
generating excessive volatility in GDP and, possibly, reduced long-term growth. This second aspect
will be the focus of our analysis, building on what the academic literature has already shown.
Following Fatás and Mihov (2013), we measure the standard deviation of the residual in the fiscal
policy reaction function (𝜎𝑖𝜀 ) and interpret it as the volatility of fiscal policy.

What about the introduction of controls in the regression? If our objective was to fully explain the
behavior of fiscal policy, we would introduce as many variables as possible. But our objective is to
understand changes in fiscal policy that are orthogonal to the countercyclical policies captured by
𝛽. Therefore, in our analysis we start with a baseline regression where no controls are introduced.
The logic is the following: imagine there is an external event that causes a certain change in fiscal
policy. Any change that is purely driven by the effects that this external event has on GDP will
already be captured by the first term (“Economic Activity”). Anything else will be additional fiscal
policy volatility that we do not want to remove from our analysis. We want that volatility to be
captured in the residual and, therefore, the right econometric specification is one without
additional controls.

We will, however, make one exception. Because of our focus on the conduct of fiscal policy in
commodity exporters, we will introduce a variation in equation (1) that includes controls that are

7
We do, however, also use the HP-filtered GDP levels as a measure of economic activity to check the robustness of
our results. The results using this alternative measure are highly consistent with those reported in Table 1.
8
In our specification, there are potential problems of endogeneity as fiscal policy could potentially affect economic
activity contemporaneously. The academic literature has acknowledged these issues but, because of the lack of an
obvious instrument, has made use of OLS in many instances (for example, Aghion, Hemous and Kharroubi 2014;
Alesina, Campante and Tabellini 2008; and Lane 2003b). Fatás and Mihov (2013) explored a set of instruments to
test the robustness of the results presented in those earlier papers. Given that in those tests the results produced
using different methods were similar, and for the sake of simplicity, we only make use of OLS in our paper.

6
specific to these countries. Specifically, we will include commodity prices as a control to
understand whether the inclusion of these prices explains some of the volatility of fiscal policy.
The idea is to test whether the fiscal volatility in commodity-exporting countries comes solely from
commodity price volatility or not.

3.2 Data

We make use of annual data over the 1990-2021 period. The choice of our sample period is
dictated by data availability. The data comprises 184 countries, with 148 EMDEs and 36 advanced
economies. We classify countries into ‘commodity exporters’ and ‘non-commodity exporters’ by
applying the classification criteria used in World Bank (2022).9 Based on this classification, our
sample comprises a diverse set of 90 commodity-exporting EMDEs. ‘Non-commodity exporting’
EMDEs are simply the ones not classified as commodity exporters.

We analyze three fiscal policy variables from the government budget: primary expenditure,
government revenue, and primary balance (Source: IMF World Economic Outlook). In addition, to
understand whether different components of expenditures matter more than others, we also
analyze government consumption as a measure of fiscal policy (Source: World Bank World
Development Indicators).

Our data comes from multiple sources. For commodity exporters, we obtain data on natural
resource rents (as percent of GDP) from the World Bank’s World Development Indicators. Fiscal
rules are based on the IMF’s Fiscal Rules Dataset (Davoodi et al. 2022). Country-specific commodity
terms of trade indices are obtained from the IMF. We use institutional and political variables from
the International Country Risk Group (ICRG) and the Polity IV Database. We use the Chinn-Ito index
as our measure of capital account openness. We provide details of the country coverage, variables
included in the analysis, and data sources in Appendix 1.

4. Measuring fiscal policy volatility

4.1 Characterizing fiscal policy volatility

We start by checking the cyclicality of each of the four measures of fiscal policy, although this is
not the focus of our analysis. As described above, we measure cyclicality by the estimate of the
parameter 𝛽 in equation (1). This parameter includes both the working of automatic stabilizers as
well as any discretionary changes in fiscal policy implemented in response to fluctuations in GDP.
Figure 3 summarizes our results for two groups of countries: advanced economies versus EMDEs;

9
An economy is defined as a commodity exporter when, on average in 2017-19, either (1) total commodity exports
accounted for 30 percent or more of total exports or (2) exports of any single commodity accounted for 20 percent
or more of total exports. Economies for which these thresholds were met as a result of re-exports were excluded.
When data were not available, judgment was used.

7
commodity exporters versus the rest.10

Figure 3A shows that, on average, primary expenditure plays a strong countercyclical role in
advanced economies while it remains acyclical for EMDEs. The government consumption element
of the budget shows a pattern of mild procyclicality for advanced economies and moderate
procyclicality for EMDEs. This is consistent with the fact that the most countercyclical element of
the budget is likely to be transfers and not consumption.11 For both groups revenues are almost
proportional to GDP with an elasticity which is not too far from one, but slightly above, as
expected. The budget balance elasticity is significantly different across the two groups reflecting
the countercyclical nature of expenditures in advanced economies. These results are consistent
with the academic literature that has shown that fiscal policy tends to be procyclical in EMDEs and
acyclical/countercyclical in advanced economies, although the procyclicality in EMDEs has declined
somewhat over time (Arroyo Marioli and Vegh forthcoming; Carneiro and Garrido 2016; Frankel et
al. 2013; Kaminsky et al. 2004; and Richaud et al. 2019).12

Figure 3B compares the cyclicality of fiscal policy for commodity exporters versus non-commodity
exporters. We find that non-commodity exporters display countercyclical expenditures on
average, although the size of the 𝛽 coefficient is smaller than that for the group of advanced
economies. On the other hand, commodity exporters are characterized by acyclical spending
(same as the group of EMDEs). Government consumption is once again more procyclical than
expenditures, on average.

The coefficient on revenues is higher for commodity exporters probably because government
revenues are influenced by commodity prices that are likely to be procyclical (Villafuerte and
Lopez-Murphy 2010). As a result, the coefficient for the budget is quite similar for the two groups.
For commodity exporters, the countercyclicality of taxes partially compensates for the acyclicality
of spending (Kaminsky, Reinhart, and Vegh 2004). Our results on cyclicality, by being consistent
with previous literature, provide reassurance that the fiscal policy reaction function we are
estimating is capturing the right information on the behavior of fiscal policy.

Next, we turn to the focus of our analysis which is the volatility (σεi ) of the residual in equation
(1),computed for each country in our sample. It is first interesting to ask whether our four different
measures of fiscal policy volatility provide similar perspectives on fiscal policy. Table 1 presents a
simple cross-country correlation between the four indicators. As expected, these indicators are
highly correlated, with the lowest correlation being between revenues and the primary balance.

10
Country averages are calculated using weights based on the size of each economy measured by total GDP using
PPP. We also calculated simple averages for all the fiscal policy variables and the results were similar, indicating that
our results are not being driven by outliers.
11
There is also the possibility that changes in investment explain some of this difference, but investment is a much
smaller share of expenditures (particularly in advanced economies) and it is unlikely that investment can react
contemporaneously to changes in GDP.
12
The difference between the means of the fiscal cyclicality parameters for the two country groups shown in Figure
3 is statistically significant at the 1 percent level.

8
As done in Figure 3 for the cyclicality parameter, we first establish some stylized facts for our
measures of volatility by comparing them across the two country groups (Figure 4). A few stylized
facts emerge. First, as shown in Figure 4A, the volatility of primary expenditures, government
consumption, and revenues is much higher for EMDEs than for advanced economies. The
difference between the means of the two groups of countries is statistically significant at the 1
percent level. It is interesting that the gap in the volatility of government consumption is larger
than that for primary expenditures, highlighting the role of government consumption in the
volatility of fiscal policy.

Second, the primary balance volatility is smaller and closer between the two groups compared with
the other fiscal policy indicators, but one must be careful in doing a direct comparison to the other
two variables. A 1 percent exogenous change in government expenditures for an average EMDE
only leads to a change in the primary balance (as a percent of GDP) of about 0.3 percent because
government size is about 30 percent on average.13 If we adjust for this factor the differences
between the two indicators (expenditures and the primary balance) are not that large.

Third, as shown in Figure 4B, the group of commodity exporters displays a much larger volatility of
fiscal policy compared to non-commodity exporters or to either of the other two groups in Figure
4A. The difference between the means for commodity exporters and non-commodity exporters is
significant at the 1 percent level. As in the case of EMDEs, government consumption is more
volatile than the other indicators, although by a small margin.

Now we look at how this volatility has changed over the years. We make use of the results from
equation (1) and calculate averages of the standard deviation of the residuals over five-year rolling
windows. Figure 5 displays the results for the four fiscal policy indicators for the group of EMDEs.
While the patterns across the four charts are not identical, there is an overall downward trend in
at least three of the indicators: primary expenditures, government consumption, and revenues.
The trend for the primary balance indicator is less obvious although there is a clear decline in
volatility in the years that followed the GFC which was only interrupted by the volatility associated
with the COVID crisis.14

We reproduce the same analysis now for the group of commodity exporters and also explore the
correlation between fiscal volatility and energy prices (Figure 6). The patterns for fiscal volatility
indicators are similar, with a clear downward trend in the volatility of government consumption
and revenues. The trend is less obvious in the case of primary expenditures or the primary balance
although, as in the case of EMDEs, there was a period of low volatility following the GFC and before
the pandemic-induced crisis. Further, there does not appear to be any clear relationship between
fiscal volatility and energy prices over the sample period although the volatility in primary

13
‘Government size’ is measured as the share of general government total expenditure in GDP (from the IMF WEO
database).
14
We have reproduced these results for the group of advanced economies, although not shown here for brevity. The
pattern is weaker. While there is some decline in the volatility of primary expenditures following the sharp spike in
the pre-2000 period, there is almost no decline in volatility for the other three indicators.

9
expenditure, revenues, and primary balance moves somewhat in line with the energy price index
in the post-GFC period.15

4.2 Determinants of fiscal policy volatility

In the previous section, we established that EMDEs and commodity exporters display higher fiscal
policy volatility than other countries. But what are the factors that make fiscal policy in these
countries more volatile? Are there specific economic characteristics, such as GDP per capita, that
can explain this? Advanced economies tend to have a significant presence of services and
manufacturing sectors that dwarf their commodity sectors. As a result, being an EMDE and a
commodity exporter is highly correlated. At the same time, the group of EMDEs masks substantial
heterogeneity in income levels across countries. Likewise, commodity exporters are also
characterized by important differences in the type of commodity exported and their degree of
commodity dependence. In the empirical exercises that follow, we examine the role of these
heterogeneities across countries in driving fiscal policy volatility.

We focus on indicators of fiscal policy that are related to the spending side of the budget. While
each of the four fiscal policy indicators contains important information about fiscal policy, primary
expenditures, and government consumption are likely to provide a more accurate perspective on
the volatility of fiscal policy decisions. The reason is that capturing exogenous changes in fiscal
policy using a specification like the one in equation (1) is more straightforward when using
expenditures than when using revenues (or the primary balance). The automatic stabilizer
component of expenditures tends to be small, so changes in expenditures tend to be driven by
discretionary stimulus packages or by changes that are unrelated to the business cycle, and these
latter ones are the changes we capture in our measure of volatility. On the other hand, when it
comes to revenues, our linear specification might not appropriately capture the potential non-
linear nature of tax elasticities. Given that we are dealing with a large sample of diverse countries,
it would be impossible to incorporate more precise specifications of tax elasticities for each
country. Our approach mimics that of the academic literature that typically uses government
expenditures or government consumption to measure volatility in fiscal policy (see, for example,
Fatás and Mihov 2013).

We start by examining the determinants of fiscal policy volatility. Table 2 displays a first set of
exploratory results. We present three specifications each for primary expenditures (columns (1) to
(3)) and government consumption (columns (4) to (6)) as our indicators of fiscal policy volatility.
We start with the simplest possible specification in columns (1) and (4). Results show that the
dummy variables for EMDEs and commodity exporters are significant and explain as much as 30
percent of the cross-country volatility in fiscal policy. That is, even after controlling for EMDEs,
commodity exporters by themselves display more volatility. This suggests that commodity
dependence is a source of volatility by itself. Of course, these dummy variables represent a diverse

15
The energy index is taken from the World Bank Commodities Prices Data. We also examined the extent to which
fiscal policy volatility comoves with non-energy prices. Since the energy and non-energy indexes are highly
correlated over the sample period, we chose to include only the energy index in Figure 6 for simplicity.

10
group of countries. EMDEs are defined by the level of development while commodity exporters by
the export share of commodities, but there is heterogeneity across countries within each of the
groups. Not all commodity exporters export the same commodities, and the nature of different
commodities makes their production structures very different. We, therefore, introduce two
variables to account for the heterogeneity across countries. First, we introduce (the log of) GDP
per capita to better capture the level of development for individual countries. The addition of GDP
per capita does not change the magnitude or the significance of the coefficient of either of the two
dummy variables. In fact, GDP per capita is not significant in column (2) although it is significant in
column (5). This suggests that EMDEs are not different simply because their GDP per capita is lower
than that of advanced economies, and that there are other features of fiscal policy that differ
across EMDEs.

Second, we add a variable (“resource rents”) that measures the rents coming from natural
resources as a share of GDP. Higher rents coming from natural resources are likely correlated with
the percentage of government revenues that come from the commodities sector.16 The objective
here is to allow our explanatory variable to have a much finer distinction depending on the actual
revenues coming from natural resources rather than relying on a dummy variable that treats all
countries with significant income coming from natural resources as equal. The introduction of this
variable (Columns (3) and (6)) makes the dummy for commodity exporters become insignificant
and even negative. This should not be a surprise as it reinforces the idea that economies with large
commodities sectors display more volatility in fiscal policy. In other words, it is not just the
presence of an important commodity sector, but the size of the sector also matters.

The introduction of this new variable also reduces the size of the EMDE dummy as some of these
countries have substantial rents coming from natural resources and it, therefore, absorbs some of
the variation in fiscal policy volatility. Note that GDP per capita becomes significant once this
variable is introduced, suggesting that higher levels of GDP per capita are associated with lower
fiscal policy volatility. Therefore, taken together these results suggest that both the level of
development and the degree of commodity dependence help explain fiscal volatility. Finally, the
fact that a limited set of variables explains about 45-50 percent of the cross-country variation in
fiscal policy suggests that our measure of volatility is not simply capturing noise from the initial
regression in equation (1).

Next, we exploit the richness of our diverse sample of commodity exporters by separating them
into three groups—agriculture, metals, and energy exporters—depending on the main type of
commodity exported to examine whether there are differences in fiscal behavior across different
types of commodity exporters. Table 3 presents the results. We find evidence of additional
volatility for all three groups, but it is for the energy exporters where the coefficient is always

16
We chose to use ‘resource rents’ instead of resource revenues due to data availability issues. The ‘Natural
Resource Governance Institute’ provides data on resource revenues (as percent of GDP) complied from the
Extractive Industries Transparency Initiative’s (EITI), IMF, and the International Centre for Tax and Development
(ICTD). The database provides data for about 90 countries from the 1980s onwards although data availability varies
across countries. The correlation between our measure of total resource rents and the resource revenues from this
dataset is about 69 percent.

11
highly significant (see columns (1) and (3)). When using government consumption as our fiscal
policy variable, all three dummies are significant although the significance is always stronger for
energy exporters. Interestingly, once we control for resource rents, the significance of the three
dummies drops except in one specification. This suggests that part of the difference among types
of commodity exporters is due to the difference in their degree of commodity dependence. That
is, energy exporters depend more on their energy exports than agricultural exporters depend on
their agriculture exports. Also, this should not be a surprise given the strong multicollinearity
between these variables and the fact that, as we have argued above, resource rents is a more
precise measure of the influence of commodity exports.

So far, we have explored the degree and the type of commodity dependence, and degree of
development as factors driving fiscal policy volatility. Next, we go beyond economic explanations
of fiscal policy volatility and explore political economy and institutional variables. The list of
potential variables here is large and the academic literature has used many of them. Our goal here
is not to do a horse race between all the potential explanatory variables but to understand whether
some key variables can account for the higher volatility in EMDEs and commodity exporters.

Table 4 presents the results. As in the above exercise, we present results for the two variables that
capture the spending side of the budget—primary expenditures and government consumption.
Columns (1) and (4) present a simple specification that includes two institutional variables often
used in the literature: political constraints and control of corruption. Both variables are significant,
have the right sign and, just by themselves, explain close to 40 percent of the cross-country
variation of our fiscal policy volatility measure.17

We then add the economic determinants of Table 2 in columns (2) and (5) and now we can explain
close to 60 percent of the cross-country variation in fiscal policy volatility, roughly 20 percent more
than in columns (1) and (4). There are several other interesting results to notice. The EMDE dummy
variable changes sign and is not significant. This suggests that the additional volatility that
characterizes EMDEs is coming from political economy and institutional variables, such as the two
we have chosen.

In Table 2, once we controlled for resource rents the dummy variable for commodity exporters
turned non-significant. That is not the case anymore. For example, in column (5) of Table 4 the
dummy variable is again significant and positive. This means that even after controlling for political
constraints and corruption, there is something special about these economies that cannot be fully
captured by the natural resources rents variable. Notice, however, that the size of the coefficient
is much smaller than when the dummy variables were included without controls in column (1) of
Table 2. Also, GDP per capita becomes insignificant, compared to (3) and (6) in Table 2 where
political constraints and corruption control are not present. The EMDE dummy also remains

17
Institutional variables have limited time-series variation and have often been used in the literature as causal
explanations of different macroeconomic phenomena. However, one cannot rule out that the causality might run in
the other direction as well. This might be particularly relevant for countries with natural resources since their
existence could be the source of corruption (see De Rosa and Iootty 2012; Vicente 2010).

12
insignificant. This indicates that institutional factors may be the underlying explanation for the
observed role that development plays in fiscal volatility.

Finally, in columns (3) and (6) of Table 4 we include one additional variable that might be relevant
for commodity exporters— a dummy variable representing whether a country has a sovereign
wealth fund (SWF) or not. Many commodity-exporting countries have established SWFs to achieve
multiple objectives, including reducing budget volatility and smoothing intergenerational
government consumption. The variable appears consistently with a negative sign, validating recent
studies which find that the existence of SWFs can reduce the procyclicality of fiscal policy in
commodity-dependent developing countries (for example, Kassouri and Altıntaş 2021; Ouedraogo,
and Sourouema 2018). However, the coefficient is not significant which could be the outcome of
collinearity between the existence of a SWF and the other institutional variables included in the
regressions.

The results presented in Table 4 show that the institutional features of the countries in our sample
can explain a significant amount of fiscal policy volatility. Some of these features are quite broad
and not easily relatable to a particular reform agenda (for example, political constraints). We now
explore a set of other variables that are more easily influenced by policy changes. Results are
presented in Table 5 where we only focus on primary expenditures for brevity, given the similarity
in results so far from the two spending variables.

We start by including the following three variables: an index of the number of fiscal policy rules in
place; the Chinn-Ito indicator of openness of the capital account, and a dummy variable for the
exchange rate regime which takes the value “0” for fixed rate regimes and “1” for floating
exchange rate regimes (Column (1)).18 The three variables are significant and their coefficients of
the expected sign. The existence of fiscal rules, a liberalized capital account, and more flexible
exchange rates all reduce fiscal policy volatility. It is important to note that these three variables
also explain a large share of the volatility of fiscal policy, around 32 percent.

We then introduce our two dummies for country groups (Column (2)), and the significance of the
three variables remains. This indicates that these policy tools can reduce volatility regardless of
the level of development or commodity dependence. Also, as we have seen before, the EMDE
dummy is not significant while commodity exporters still stand out as having more volatility.
Adding a set of other controls (Column (3)) confirms some of our previous results. Specifically,
introducing rents from natural resources weakens the explanatory power of the commodity
exporters dummy. However, we can explain a much larger share of volatility, almost 64 percent.
The coefficient for the existence of a SWF remains negative, although non-significant, possibly
because one of the new policy variables has already captured the relevant effect.19

18
See Appendix 1 for a detailed description of these variables.
19
There is also a difference in sample size relative to Table 4 since not all variables are available for all countries. We
have checked whether the difference in sample size is responsible for some of the variation in results and this is
generally not the case. For example, the results of Table 5 still hold when the regressions are estimated for the
subsample of EMDEs or the subsample of commodity exporters.

13
Finally, in the last column, we include the two institutional variables. ‘Control of corruption’
remains significant and of the right sign while ‘political constraints’ is not significant anymore.20
The total fraction of explained volatility increases meaningfully: overall, policy variables,
commodity dependence, and institutional variables can explain up to 72 percent of fiscal volatility.

The results of Table 5 offer a policy view on how certain frameworks, such as fiscal rules, can help
reduce the volatility of fiscal policy. Such frameworks have been shown to be effective in delivering
better outcomes in fiscal policy. Debrun and Kumar (2008) find evidence that fiscal rules are a
strong signal of the unobservable preferences of governments for sensible fiscal policy. Other
papers have focused on the importance of well-designed fiscal rules to deliver lower fiscal deficits
(Caselli and Reynaud 2020; Dahan and Strawczynski 2013; Debrun et al. 2008; Fabrizio and Mody
2006), reduce fiscal procyclicality (Céspedes and Velasco 2014), and reduce fiscal policy volatility
(Badinger and Reuter 2017). Among the design of the fiscal policy rules that have proven to be
relevant, some papers emphasize the positive effect of “second-generation rules”(for example,
Eyraud et al. 2018). Some have focused on the role of expenditure limits, mostly in the context of
advanced economies. For EMDEs and commodity exporters, the role of well-established rules to
decide on spending, in particular when rising commodity prices boost government revenues, is
highlighted in several papers (Bova et al. 2014; Frankel 2011).

Our analysis is performed only with the cross-section of countries. Most of the institutional
variables that we have considered as determinants have limited time-series variation, which makes
it difficult to study the impact of reforms. However, anecdotal evidence suggests that this effect is
consistent with our main results. For example, we can connect the results of Table 5 to the
downward trend in fiscal policy volatility among both EMDEs and commodity exporters shown in
Figure 5 and Figure 6.

Specifically, we examine how a key policy variable in Table 5, the number of fiscal rules, has
changed over time. Figure 7 is based on the weighted average of this variable for the two groups
and shows a clear upward trend of increasing use of fiscal rules, as also documented in Bova et al.
(2014). This, combined with the results of Table 5, can be seen as an explanation of the improved
fiscal policy performance of these countries. This is consistent with the evidence presented in
Céspedes and Velasco (2014) on how the increasing use of fiscal rules has reduced the
procyclicality of fiscal policy in commodity exporters.

4.3 Fiscal policy volatility and commodity prices

Our results thus far have shown that commodity exporters are characterized by higher fiscal policy
volatility than non-commodity exporters. The fact that including natural resources rents as a
percentage of GDP explains this pattern has confirmed that the relevant channel is the revenues
coming from commodities. But is the volatility in fiscal policy just a reflection of volatility in

20
We also checked the sensitivity of the results in Table 5 to the inclusion of a measure of fiscal space, such as debt-
to-GDP. The results, although not reported here for brevity, remain robust and the coefficient of the debt-to-GDP
variable is not significant.

14
commodity prices? Could it be capturing a commodity price cycle which is not perfectly correlated
with the cycle in economic activity that is already captured by GDP growth?

To analyze these issues, we follow the methodology of Céspedes and Velasco (2014) in separating
GDP growth from the commodity price cycle by estimating a policy reaction function (i.e., equation
(1)) that includes the price of commodities. By removing the potential comovements between
fiscal policy and the price of commodities from the residual, it is possible that the volatility of
commodity exporters gets closer to that of the other countries in the sample.

We run two variations of this exercise: first, we include the country-specific commodity export
price index (from the IMF’s Commodity Terms of Trade database)—a weighted average of the
export price of commodities, where the weight is the share of exports of a particular commodity.
The second specification makes use of the price of oil.21 Figure 8 shows the results for our four
measures of fiscal policy volatility. As is clear from the four panels, the inclusion of the variation in
commodity prices does not change the fact that commodity exporters have a much more volatile
fiscal policy than other countries. In fact, there is almost no difference between the three
specifications regardless of the fiscal policy variable being used. One potential explanation of our
result is that the direct effect of commodity prices cannot be separated from the indirect effect
that they have through economic activity. This is consistent with the evidence presented in Husain,
Tazhibayeva, Ter-Martirosyan (2008). An alternative explanation is that the relationship between
commodity prices and fiscal policy is much more complex than our simple fiscal policy rule.

5. Macroeconomic effects of fiscal policy volatility

So far, we have documented the pattern of fiscal policy volatility with a focus on EMDEs and
commodity exporters. We have shown that countries with certain institutional characteristics and
policies have a more volatile fiscal policy. But what are the macroeconomic consequences of this
additional volatility?

We measure these macroeconomic effects on both the volatility of GDP growth and the growth of
GDP per capita by using the methodology of Fatás and Mihov (2013). We start with a regression of
the type

∆𝑦
𝜎𝑖 = 𝛼 + 𝜌𝜎𝑖𝜀 + 𝛾𝑋𝑖 + 𝑢𝑖 (2)

∆𝑦
Where 𝜎𝑖 is the volatility of GDP growth and 𝜎𝑖𝜀 is the measure of fiscal policy volatility. 𝑋𝑖
represents a set of controls.

Table 6 presents the results, with fiscal policy volatility measured using primary expenditures.
Whether by itself or when including some of our standard controls, fiscal policy volatility is related
to higher output volatility. Interestingly, neither EMDEs nor commodity exporters as a group

21
We use the average of Brent, Dubai and WTI oil prices (in nominal US dollars) from the World Bank’s Commodities
Price Data (the “Pink Sheet”).

15
display higher output volatility except for what is already mediated through their higher fiscal
policy volatility.

Columns (3) to (5) make use of instrumental variables in an attempt to capture the causal effect of
fiscal policy volatility. Instrumental variables are taken from our specification of Table 4. Political
constraints and control of corruption are variables that are often used in the literature as
instruments for government policies since they are seen as exogenous to economic conditions and
mostly affect the economy through their effects on the state and government behavior (Fatás and
Mihov 2013). The results using instrumental variables are similar to the OLS results. Only in column
(5) we see a smaller coefficient for fiscal policy volatility, but it is important to note that this
specification includes a larger set of instruments and the sample size is almost 50 percent of our
baseline specification because of the lack of data. The dummy for EMDEs is only significant at the
10 percent level, confirming that the additional volatility in economic activity in these countries is
absorbed by our measure of fiscal policy volatility. That is, the main channel through which we see
excess output volatility in EMDEs is via the government spending behavior. In the case of
commodity exporters, the dummy is negative although non-significant.

Finally, we look at the implications for growth by estimating variants of a standard growth
regression (Barro 1991). The benchmark specification is given by

∆𝑦𝑖 = 𝛼 ′ + 𝜌′ log (𝜎𝑖𝜀 ) + 𝛾 ′ 𝑍𝑖 + 𝑢𝑖 (3)

Where, ∆𝑦𝑖 is the average per capita GDP growth for country 𝑖; 𝜎𝑖𝜀 is the measure of fiscal policy
volatility–our key regressor; 𝑍𝑖 is a vector of variables that have been found to have significant
explanatory power for the cross-country variation in growth. We estimate equation (3) using both
OLS as well as instrumental variables to address endogeneity concerns.

Table 7 presents the results of these growth regressions. Here we follow the specification of Fatás
and Mihov (2013) who include controls based on the growth regressions of Sala-i-Martin,
Doppelhofer and Miller (2004).22 These controls are shown to be the most robust variables in a
standard growth regression. Fiscal policy volatility is not significant when included by itself, but it
becomes significant when controls are introduced. The coefficient for fiscal policy volatility in the
instrumental variables specification (column (3)) is significant and of magnitude comparable to
that in the OLS regression. The size of the coefficient is also broadly in line with recent estimates
in the literature.23 One way to think about its economic significance is that a one standard
deviation decrease in fiscal policy volatility (i.e., in the order of 6.38 percentage points) will
increase growth in GDP per capita by 0.7 percentage points. This is a large number given that

22
We have estimated different specifications including a variety of controls. For example, we have included in these
regressions controls such as the existence of a sovereign wealth fund. The results are not significant. Note that this
variable is already included as an instrument for fiscal policy volatility.
23
Our specification differs from that of Fatás and Mihov (2013) in that we do not transform the policy volatility
variable by using logs. If we were to do that transformation, the coefficient would be around 1, which is consistent
with the results presented in Fatás and Mihov (2013).

16
average growth of GDP per capita in our sample is around 1.8 percent. Also, based on the results
in Table 2 fiscal policy volatility for commodity exporters was about 3.3 points higher than that for
other countries. This translates into a reduction of growth in GDP per capita of about 0.35
percentage points.

These results have relevant policy implications. An additional 0.7 annual growth rate implies 23
percent growth over our sample period. This explains more than 8 percent of the income gap
between advanced economies and EMDE in our sample. Anecdotal evidence supports these
results. For example, Frankel (2011) documents how Chile, a commodity-exporting emerging
market, introduced a series of fiscal rules and policies in the post-1990s period with the aim of
reducing its discretionary expenditure. These included rules on spending, deficit, and the
establishment of a sovereign wealth fund. External experts were also given a role in making
projections, limiting the role of government executives even further. As a result, Chile’s
expenditure volatility has fallen in the last 20 years. The Chilean income gap versus advanced
economies fell from 60 percent in 2000 to 54 in 2019.

6. Conclusions and policy implications

We examine the behavior of fiscal policy over the 1990-2021 period for a larger sample of countries
than that used in previous studies, with a focus on EMDEs and commodity-exporting countries.
We find that fiscal policy tends to be more volatile in EMDEs than in advanced economies as well
as in commodity exporters relative to non-commodity exporters. We also find that this volatility
increases with the degree of commodity dependence. This pattern holds for all four fiscal policy
indicators used – primary expenditure, revenue, government consumption, and primary balance-
to-GDP.

Institutional and policy variables account for a large fraction of the cross-country variation in fiscal
policy volatility. The existence of fiscal rules, a more liberalized capital account, and more flexible
exchange rates are all associated with lower fiscal policy volatility. Further, we find that fiscal policy
volatility is associated with higher output volatility and is detrimental to economic growth. Our
results suggest that a one standard deviation reduction in fiscal volatility in EMDEs over the last 30
years could have reduced the income gap relative to advanced economies by as much as 8 percent.

Our results offer insights for policy makers in commodity-exporting EMDEs on the appropriate
design of fiscal policies, institutional frameworks, and the impact of fiscal policy decisions. A
sustainable, properly designed, and stability-oriented fiscal framework would help build buffers
during commodity price booms to prepare for a subsequent slump in prices. Fiscal rules can help
in this regard by dampening the procyclicality and volatility of government spending and improving
macroeconomic performance. Stabilization funds can be used to invest windfalls in commodity
revenues, thereby saving resource revenues for future generations. Our results suggest that
changes in policy, even if they are motivated by relevant economic or political arguments, should
be implemented carefully, and should consider their effects on policy volatility and ultimately on
economic growth.

17
Finally, our findings highlight the complex challenges faced by commodity-exporting EMDEs in
maintaining macroeconomic resilience in the face of commodity price fluctuations. In low-income
countries, these challenges are further compounded by lack of fiscal space and weak institutions.
The wide swings in commodity prices since the onset of the pandemic have further underscored
the vulnerabilities of the many EMDEs highly dependent on commodity exports. The role that
revenues from commodities play in the budgets of these economies and their impact on fiscal
policy volatility suggests potential benefits from diversification of their economies, away from
commodities. Policies to encourage export diversification can help reduce reliance on commodity
exports, stabilize export earnings, and promote long-run growth (Bleaney and Greenaway 2001;
Ghosh and Ostry 1994; Hesse 2008; Joya 2015).

18
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 Figure 1. Budget balance and gross government debt over the last two global crises

A. Budget balance B. Gross government debt

Sources: IMF World Economic Outlook; World Bank.

Notes: EMDEs = emerging market and developing economies. Country weights based on PPP GDP.
A. Weighted averages of budget balance (as percent of GDP) for 35 advanced economies and 148 EMDEs. Data from
2000 to 2021.
B. Weighted averages of gross government debt (as percent of GDP) for 30 advanced economies and 144 EMDEs.
Data from 2000 to 2021.

Figure 2. Commodity prices

Source: World Bank.

Note: Last observation is December 2022.

25
 Figure 3. Cyclicality of fiscal policy: By country groups
A. EMDEs vs. advanced economies B. Commodity exporters vs. non-commodity
exporters

Sources: Authors’ calculations; IMF WEO Database; World Bank.

Note: Figures show the weighted averages, by country group, of the 𝛽 coefficient in equation (1) with the
dependent variables being real primary expenditure growth, real government consumption growth, real
revenue growth, and change in primary balances (as percent of GDP). Weights are based on the size of each
economy measured by total GDP using PPP.

26
 Figure 4. Fiscal policy volatility: By country groups
A. EMDEs vs advanced economies B. Commodity exporters vs. non-commodity
exporters

Sources: Authors’ calculations; IMF WEO Database; World Bank.

Note: Figures show the weighted averages, by country group, of the standard deviations of the residuals
obtained from estimating equation (1) for four different dependent variables: log difference of real primary
expenditures, log difference of real government consumption, log difference of real revenues, and the change in
primary balance (% of GDP). Weights used are the PPP GDP shares in the respective group’s total GDP.

27
 Figure 5. Fiscal policy volatility in EMDEs — Five-year rolling windows
A. Primary expenditure B. Government consumption

C. Revenues D. Primary balance

Note: Figures show the average standard deviation of residuals from equation (1) for EMDEs. The standard
deviation is calculated using a five-year rolling window.

28
 Figure 6: Fiscal policy volatility in commodity exporters – Five-year rolling windows
A. Primary expenditure B. Government consumption

C. Revenues D. Primary balance

Note: Figures show the average standard deviation of residuals from equation (1) for commodity-exporting
countries. The standard deviation is calculated using a five-year rolling window.

29
 Figure 7. Fiscal rules in place

A. EMDEs B. Commodity exporters

Sources: Davoodi et al. (2022); World Bank.

Note: EMDEs = emerging market and developing economies. Figures show the weighted averages of the number
of fiscal rules in place.
A. Weights used are each country’s GDP as a share of total EMDEs GDP, on a PPP basis.
B. Weights used are each commodity-exporting country’s GDP as a share of the group’s GDP, on a PPP basis.

30
 Figure 8. Alternative measures of fiscal policy volatility

A. Primary expenditures B. Revenues

C. Government consumption D. Primary balance

Sources: IMF WEO Database; World Bank.

Note: Figures show the average standard deviations of the residuals obtained from equation (1) with the
dependent variables being the log difference of real primary expenditures (Figure 8.A), log difference of real
revenues (Figure 8.B), the log difference of real consumption (Figure 8.C), and the change in primary balance
as percent of GDP (Figure 8.D). ‘No control’ refers to the baseline specification with real GDP growth as the
only regressor.

31
 Table 1. Correlation between measures of volatility

Primary Revenues Primary Government

Expenditures Balance Consumption
Primary Expenditures 1.00
Revenues 0.68 1.00
Primary Balance 0.66 0.30 1.00
Government Consumption 0.70 0.62 0.32 1.00
Note: Correlations between the standard deviations of the residuals obtained from regressing the log
difference of real primary expenditures, log difference of real revenues, the change in primary balance
(percent of GDP), and the log difference of real consumption on real GDP growth, as specified in equation
(1).

Table 2. Determinants of fiscal policy volatility

Primary Expenditures Government Consumption

VARIABLES (1) (2) (3) (4) (5) (6)

EMDE 4.930*** 4.123*** 1.756** 5.749*** 3.769*** 1.547

(0.657) (1.177) (0.870) (0.714) (0.958) (0.980)
Commodity exporters 3.295*** 3.143*** -1.053 4.601*** 4.323*** 0.771
(0.852) (0.935) (0.845) (0.918) (0.927) (1.051)
GDP per capita -0.498 -1.240*** -1.201** -1.933***
(0.603) (0.423) (0.509) (0.500)
Resource rents 0.376*** 0.316***
(0.0814) (0.052)
Constant 3.930*** 9.217 17.390*** 2.324*** 15.08*** 23.102***
(0.460) (6.456) (4.495) (0.402) (5.427) (5.355)

Observations 178 177 177 167 166 166

R-squared 0.219 0.224 0.451 0.324 0.349 0.500
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
‘EMDE’ is a dummy variable that takes the value “1” if a country is classified as an EMDE, and “0” otherwise.
‘Commodity exporters’ is a dummy variable representing whether a country is a commodity exporter or not.

32
 Table 3. Determinants of fiscal policy volatility, by type of commodity
Primary Expenditures Government Consumption
VARIABLES (1) (2) (3) (4)

EMDE 2.900*** 1.794** 2.613** 1.539

(1.047) (0.867) (1.121) (1.045)
Agriculture exporters 0.712 -0.592 2.197* 1.178
(0.983) (1.036) (1.294) (1.350)
Metal exporters 2.236* -0.136 2.984** 1.224
(1.337) (1.353) (1.395) (1.328)
Energy exporters 6.185*** -1.125 7.250*** 1.139
(1.625) (1.252) (1.561) (2.004)
GDP per capita -1.243** -1.114** -1.885*** -1.855***
(0.523) (0.453) (0.644) (0.608)
Resources rents 0.377*** 0.307***
(0.089) (0.0657)
Constant 17.081*** 16.017*** 22.318*** 22.23***
(5.593) (4.818) (6.855) (6.466)

Observations 177 177 166 166

R-squared 0.292 0.450 0.407 0.503
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. ‘EMDE’ is a dummy variable that takes
the value “1” if a country is classified as an EMDE, and “0” otherwise. ‘Agriculture’, ‘Metal’, and ‘Energy’ exporters
are dummy variables that take the value “1” if a country is a net exporter of the respective commodity group and
“0” otherwise.

33
 Table 4. Institutional determinants of fiscal policy volatility
Primary Expenditures Government Consumption
VARIABLES (1) (2) (3) (4) (5) (6)

Political constraints -11.27*** -3.596 -4.095 -8.497*** -0.714 -1.037

(2.502) (3.224) (3.298) (2.834) (3.220) (3.284)
Control of corruption -1.997*** -1.836*** -1.821*** -2.908*** -1.674** -1.668**
(0.421) (0.570) (0.570) (0.530) (0.653) (0.661)
EMDE -2.381* -2.418* -1.397 -1.441
(1.266) (1.272) (1.487) (1.456)
Commodity exporters 0.661 0.843 2.062 2.199*
(0.747) (0.716) (1.273) (1.300)
Resource rents 0.281*** 0.284*** 0.253*** 0.256***
(0.0688) (0.0699) (0.0567) (0.0551)
GDP per capita -0.548 -0.349 -1.479** -1.347*
(0.464) (0.496) (0.617) (0.739)
SWF -0.945 -0.627
(0.773) (1.198)
Constant 17.92*** 19.44*** 17.96*** 19.73*** 25.67*** 24.69***
(1.305) (5.025) (5.114) (1.615) (6.616) (7.544)

Observations 133 132 132 130 129 129

R-squared 0.394 0.595 0.599 0.363 0.543 0.544
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. ‘EMDE’ is a dummy variable that takes the
value “1” if a country is classified as an EMDE, and “0” otherwise. ‘Commodity exporters’ is a dummy variable
representing whether a country is a commodity exporter or not. ‘SWF’ is a dummy equal to “1” if a country has a
sovereign wealth fund and “0” otherwise.

34
 Table 5. Policy determinants of fiscal policy volatility
Primary Expenditures
VARIABLES (1) (2) (3) (4)

Fiscal policy rules -1.171*** -0.947*** -1.040** -0.694**

(0.336) (0.348) (0.411) (0.308)
Capital account openness -8.908*** -7.312*** -4.256** -4.202**
(2.192) (2.574) (1.729) (1.666)
Exchange rate regime -4.245*** -4.722*** -4.541*** -3.206***
(0.899) (1.093) (1.294) (0.857)
EMDE -0.398 0.536 -1.255
(1.276) (1.151) (0.970)
Commodity exporters 3.356*** 0.0398 1.082
(1.134) (0.849) (0.753)
Resource rents 0.543*** 0.402***
(0.180) (0.0678)
GDP per capita 1.023 0.282
(1.091) (0.651)
SWF -0.324 -0.349
(0.832) (0.703)
Political constraints 3.963
(4.676)
Control of corruption -0.761*
(0.388)
Constant 16.48*** 14.04*** 0.928 8.710
(2.113) (2.836) (10.191) (5.579)

Observations 93 93 93 77
R-squared 0.324 0.371 0.636 0.713
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. ‘EMDE’ is a dummy
variable that takes the value “1” if a country is classified as an EMDE, and “0” otherwise.
‘Commodity exporters’ is a dummy variable representing whether a country is a commodity
exporter or not. ‘SWF’ is a dummy equal to “1” if a country has a sovereign wealth fund and “0”
otherwise.

35
Table 6. Effects of fiscal policy volatility on GDP growth volatility
GDP growth volatility
OLS IV
VARIABLES (1) (2) (3) (4) (5)

Fiscal policy volatility

0.341*** 0.359*** 0.363*** 0.499*** 0.141***
(0.072) (0.0734) (0.104) (0.175) (0.0523)
GDP per capita 0.837* 0.886 0.318
(0.454) (0.564) (0.281)
EMDE 1.073* 0.886 0.950*
(0.624) (0.679) (0.489)
Commodity exporters 0.156 -0.715 -0.339
(0.412) (0.446) (0.388)
Constant 1.358** -7.421 1.309** -8.426 -0.762
(0.527) (5.097) (0.649) (6.548) (3.037)

Observations 178 177 133 132 77

R-squared 0.300 0.338 0.23 0.254 0.238
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0. Fiscal
policy volatility in all specifications is measured using primary expenditures.
Instruments for (3) and (4): Political constraints; control of corruption.
Instruments for (5): Political constraints; control of corruption; resource rents;
fiscal rules dummy; capital account openness; and exchange rate regime.

36
Table 7. Effects of fiscal policy volatility on GDP per capita growth
GDP per capita growth
OLS IV
VARIABLES (1) (2) (3)

Fiscal policy volatility -0.022 -0.116*** -0.110***

(0.060) (0.022) (0.036)
Government size 0.013 0.020
(0.012) (0.013)
Initial GDP per capita -0.659*** -0.767***
(0.138) (0.147)
Capital account 1.210*** 1.230***
openness
(0.302) (0.314)
Investment price -1.481*** -1.548***
(0.392) (0.432)
Constant 1.986*** 8.416*** 9.202***
(0.533) (1.157) (1.332)

Observations 177 161 128

R-squared 0.006 0.356 0.403
Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1
Fiscal policy volatility in all specifications is measured using primary expenditures.
Instruments for (3): Political constraints; control of corruption.

37
Appendix 1
Table A1: Country coverage and groups
Advanced economies (36)
Australia;* Austria; Belgium; Canada*; Cyprus; Czechia; Denmark;
Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China;
Iceland*; Ireland; Israel; Italy; Japan; Korea, Rep.; Latvia; Lithuania;
Luxembourg; Malta; Netherlands; New Zealand; Norway*; Portugal;
Singapore; Slovak Republic; Slovenia; Spain; Sweden; Switzerland;
Taiwan, China; United Kingdom; United States
Emerging Market and Developing Economies (EMDEs) (148)
Commodity Exporters (89)
Energy exporters (32) Algeria; Angola; Azerbaijan; Bahrain; Bolivia; Brunei Darussalam;
Cameroon; Chad; Colombia; Congo, Rep.; Ecuador; Equatoria
Guinea; Gabon; Ghana; Indonesia; Islamic Republic of Iran; Iraq;
Kazakhstan; Kuwait; Libya; Myanmar; Nigeria; Oman; Qatar; Russian
Federation; Saudi Arabia; Timor-Leste; Trinidad and Tobago;
Turkmenistan; United Arab Emirates; Venezuela, RB; Yemen, Rep

Other commodity exporters (58) Argentina; Armenia; Belize; Benin; Botswana; Brazil; Burkina Faso;
Burundi; Cabo Verde; Central African Republic; Chad; Chile;
Comoros; Congo, Dem. Rep.; Costa Rica; Côte d'Ivoire; Ethiopia; Fiji;
Gambia, The; Guatemala; Guinea; Guinea-Bissau; Guyana;
Honduras; Kenya; Kosovo; Kyrgyz Republic; Lao PDR; Liberia;
Madagascar; Malawi; Mali; Mauritania; Mongolia; Mozambique;
Namibia; Nicaragua; Niger; Papua New Guinea; Paraguay; Peru;
Rwanda; Senegal; Seychelles; Sierra Leone; Solomon Islands; South
Africa; Sudan; Suriname; São Tomé and Príncipe; Tajikistan;
Tanzania; Togo; Uganda; Ukraine; Uruguay; Uzbekistan; Zambia

Non-commodity exporters (59) Albania; Antigua and Barbuda; Bangladesh; Barbados; Belarus;
Bhutan; Bosnia and Herzegovina; Bulgaria; Cambodia; China;
Croatia; Djibouti; Dominica; Dominican Republic; Egypt, Arab Rep;
El Salvador; Eritrea; Eswatini; Georgia; Grenada; Haiti; Hungary;
India; Jamaica; Jordan; Kiribati; Lebanon; Lesotho; Malaysia;
Maldives; Marshall Islands; Mauritius; Mexico; Micronesia;
Moldova; Morocco; Nepal; North Macedonia; Pakistan; Palau;
Panama; Philippines; Poland; Romania; Samoa; Serbia; Sri Lanka; St.
Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines; Syrian
Arab Republic; Thailand; Bahamas, The; Tonga; Tunisia; Türkiye;
Tuvalu; Vanuatu; Vietnam
Note: The number of countries in each country group is in parenthesis. * denotes advanced economy commodity
exporters.

38
 Table A2: Variable list and sources
Variable Description Source
Fiscal policy variables
General government revenue Revenue consists of taxes, social contributions, IMF World Economic
grants receivable, and other revenue. Outlook (WEO)

Primary balance Primary net lending/borrowing is net lending IMF WEO

(+)/borrowing (-) plus net interest
payable/paid (interest expense minus interest
revenue); percent of GDP

Primary expenditure Primary expenditures are obtained by IMF WEO and authors’
subtracting interest payments from general calculations
government total expenditures. Interest
payments are calculated as the difference
between overall fiscal balance and the primary
balance (all in percent of GDP).

Government consumption General government final consumption World Development

expenditure includes all government current Indicators (World Bank)
expenditures for purchases of goods and
services (including compensation of
employees) and most expenditures on national
defense and security; excludes government
military expenditures that are part of
government capital formation.
Other country-specific
variables
Real GDP; Real GDP per capita IMF WEO

Political constraints The Political Constraints Index (POLCON) POLCON dataset (Henisz
measures the extent to which policy changes 2000)
are constrained by institutional and political
factors.

Control of corruption An index measuring of corruption within the International Country

political system; ranges from 0 to 6. Risk Guide

Government size General government total expenditure IMF WEO

(percent of GDP)

Investment price Price level of investment Penn World Tables

Capital account openness The Chinn-Ito index (KAOPEN) measuring a Chinn and Ito (2006)
country’s degree of capital account openness;
available from 1970-2019 for 182 countries.

Openness Sum of exports and imports (percent of GDP

Inflation Consumer price inflation IMF WEO

39
 Variable Description Source

Resources rents Total natural resources rents are the sum of oil World Development
rents, natural gas rents, coal rents (hard and Indicators (World Bank)
soft), mineral rents, and forest rents.

Fiscal rules The dataset covers four types of rules: budget Davoodi et al. (2022)
balance rules, debt rules, expenditure rules,
and revenue rules, applying to the central or
general government or the public sector.

SWF (Sovereign wealth fund) Dummy variable; “0” if a country does not Based on information in
have a SWF and “1” if it has a SWF. https://www.swfinstitut
e.org/fund-
rankings/sovereign-
wealth-fund
Commodity variables
Commodity terms of trade of Country-specific commodity export price IMF Commodities Terms
exports indices; Individual commodities are weighted of Trade
by the ratio of exports to total commodity
exports; rolling weights index; reference
period 2012=100; based on 40 commodities.

Oil prices Average of Brent, Dubai and WTI oil prices in World Bank
nominal US dollars Commodities Prices
Data (the “Pink Sheet”
Data)

40