Assessing fiscal policy through the lens of the financial and the commodity price cycles

We assess the link between fiscal policy and credit and commodity price booms and busts. We do so by investigating the impact of financial and commodity price cycles on the identification of episodes of fiscal consolidation and stimulus and the size of the fiscal impulse. We find that controlling for the credit cycle has an impact on the magnitude of the change in the cyclically-adjusted budget balance. The impact is lower in the case of the commodity price cycle. In addition, we show that credit booms and busts influence the cyclicality of fiscal policy, but not to the extent of significantly altering the systematic response of fiscal policy to the dynamics of real economic activity. Again, the impact of the commodity price cycle is smaller and limited to some specific cases.

JEL classification: E32, E62, Q33, E10, E40, E50, E47

Keywords: fiscal policy, financial cycles, commodity price cycles, fiscal impulse, fiscal consolidation, fiscal stimulus, cyclicality