Natural Resource Discoveries and Fiscal Discipline

We analyze the impact of natural resource discoveries on fiscal policy, focussing on the effects of expectations due to the discovery of large oil and gas deposits. The response of fiscal policy to resource discoveries is analyzed through changes in its cyclicality. To do this, we use a Local Projection method on two country-groups: high- and upper-middle-income countries (HMICs) and low- and lower-middle-income countries (LMICs) over the period 1984-2012. Our results show that natural resource discoveries do drive a fiscal policy response in HMICs and LMICs. Indeed, following the announcement of a natural resource discovery, we observe, around the first year after the discovery, the beginning of an increasing contracyclicality in total public spending in the HMICs. This contracyclicality is stronger in the presence of fiscal rules, and the response of fiscal policy is faster in the presence of good institutions. Overall HMICs have a disciplined response to a shock of natural resource discoveries. However, for LMICs, discovery shocks have different effects depending on the type of public spending: for public consumption expenditure, there is an increasing procyclicality starting from the first year after discovery, whereas for public investment expenditure, this procyclicality begins in the second year after discovery, after a slight contracyclicality before. These results are robust to different sample sizes, different specifications and various measures of the cyclicality coefficient.