Is Fiscal Policy Procyclical in Resource-Rich Countries?

We analyze fiscal policy procyclicality in resource-rich countries. We obtain a strong U-shaped relationship between the procyclicality of government capital expenditures and the resource richness measure comprised of the mineral exports share in total merchandise exports for developing countries. Such a relationship is robust to different methodologies and various checks. We consider two hypotheses: first, the political economy hypothesis, and second, the borrowing constraints hypothesis. Empirical observations appear to be consistent with the hypotheses. We build a model able to generate a U-shape effect combining political economy and borrowing constraint hypotheses. We argue that with a model of simple settings such a U-shape relationship can be obtained and interpreted.