IDB-WP No. 1739 109 Pages Posted: 30 Jan 2026 Independent Inter-American Development Bank (IDB) CREST-ENSAI Date Written: October 01, 2025 Consensus holds that Emerging Markets and Developing Economies (EMDEs) engage in procyclical fiscal b ehavior. We emphasize t hat c onsidering c onditional responses to macroeconomic shocks is crucial when evaluating fiscal cyclicality, as neglecting this can result in significant b iases. This study investigates the effects of exogenous commodity price shocks on fiscal variables in EMDEs by exploiting major narrative episodes and the heterogeneous exposure of countries to these shocks. Our results reveal that, following an expansionary shift in the terms of trade, fiscal authorities raise government spending and moderately increase taxes. The overall fiscal stance mitigates the effect of commodity price booms while leading to an improvement in the primary balance. These findings contrast with conventional wisdom but align with the optimal policy response to export price shocks predicted by a multi-good small open economy model with incomplete financial markets. We also highlight the role of institutional quality in shaping fiscal policy responses. Keywords: Fiscal policy, Commodity prices, Emerging Market and Developing Economies, Optimal policy JEL Classification: F41, F44, E32 Suggested Citation: Suggested Citation Rue Blaise Pascal - BP 37203 35712 BRUZ Rennes France Inter-American Development Bank Research Paper Series Subscribe to this free journal for more curated articles on this topic Econometric Modeling: Macroeconomics eJournal Subscribe to this fee journal for more curated articles on this topic
Petrella et al. (Thu,) studied this question.