Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/316200 
Year of Publication: 
2025
Series/Report no.: 
WIDER Working Paper No. 22/25
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
This paper investigates the effect of commodity price shocks in a commodity-exporting small open economy, and the role of fiscal policy in transmitting these shocks to the rest of the economy. Using South African data, we first estimate an empirical model using a Bayesian vector autoregression model. We then develop a New Keynesian small open economy with labour market hysteresis and commodity price shocks. We find that a commodity price shock typically has an expansionary effect as real GDP and employment increase, which translates into higher tax revenue. The results from our dynamic stochastic general equilibrium model match the data. In addition, despite not modelling the tradable and non-tradable sectors explicitly, we find that there is an opportunity cost associated with taxing the commodity sector more than home production. This results in a higher trade deficit and government spending. Consequently, we also explore the role of countercyclical fiscal policy during a commodity boom.
Subjects: 
fiscal policy
hysteresis
commodity price shock
JEL: 
E24
E32
E62
O47
Persistent Identifier of the first edition: 
ISBN: 
978-92-9256-579-4
Document Type: 
Working Paper

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