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Appendix A. Illustration of Persistence of Real Exchange Rate Evolution During Oil Booms and Busts
Appendix B. Model
Appendix C. Simulation Results
Appendix D. Data Sources
Appendix E. Price Decomposition
Appendix F. Results
We are grateful to Christopher Carroll, Pravin Krishna, Tiemen Woutersen, and Thorvaldur Gylfason for their helpful comments, and Mauricio Villafuerte for kindly providing us with his dataset. All remaining errors are ours.
Governments are often involved in the natural resource sector either through taxation, the sale of licenses to foreign companies, or more directly through government owned company.
Rajan and Subramanian (2005) found some evidence that aid causes real appreciation and a relative shrinkage of the labor-intensive tradable sector in aid-receiving countries.
The countries included in the sample are Algeria, Angola, Azerbaijan, Bahrain, Bolivia, Brunei, Cameroon, Chad, Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Indonesia, Islamic Republic of Iran, Kazakhstan, Kuwait, Libya, Mexico, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sudan, the Syrian Arab Republic, Timor-Leste, Trinidad and Tobago, United Arab Emirates, Venezuela, Vietnam, and the Republic of Yemen.
The discussion of the strategy to estimate the effect of country-specific changes in the two components of government spending, namely current spending, lncepus; and capital spending, lncax, on the change in the logarithm of real effective exchange rate, lnereer is very similar to that one and is thus omitted.
For equations (1) to (3), we are able to reject that the coefficient associated with current expenditure variable is equal to the coefficient associated with capital expenditure at least at the 95 percent confidence level.
A further advantage of the system-GMM estimation is that the use of past first differences as instruments for the levels of the right-hand-side variables reduces concerns that estimates on our coefficients (for current and capital spending and GDP) are biased due to their endogenous response to within-country changes in REER. First order and second order serial correlation tests and the Hansen test on over-identifying moment conditions indicate that the estimated models are correctly specified.
We have also checked whether our results are sensitive to outliers by applying the Grubbs test. Dropping those observations deemed as outliers by the Grubbs test yielded statistically significant point estimates on current spending that were quantitatively larger than the estimates reported in Table 1 (results not shown).
In order to formally test whether the estimated coefficient associated with oevmin in the sample of countries without fiscal rule is significantly different from the estimated coefficient in the sample of countries with fiscal rule, we applied a generalized form of the Chow test that allows for arbitrary within-country serial correlation of the error term. The results of the tests suggest that we could not reject that the the coefficients associated with oevmin in tables 6 and 7 are the same.
Lagged values used as instrument for our control variables in the GMM estimations may not satisfy the exclusion restriction, especially in light of the potential rigidity in government spending.