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Francis Y. Kumah is a senior economist with the Middle East and Central Asia Department of the IMF, and John M. Matovu is an economist with the same department. We thank our colleagues Juan Carlos Di Tata, Aasim Husain, Sam Ouliaris, Peter Winglee, Roman Zytek, and an external reviewer for insightful comments that helped enhance the quality of the paper. We are grateful to Malina Savova for commendable research assistance.
Our choice of variables to include in the VAR was influenced by the lead provided by Blanchard and Perotti (1999) and our specific interest in sensitivity of fiscal outcomes to commodity price shocks. Nevertheless, we investigated the impact of world interest rate shocks on government finances—the results show insignificant sensitivity of the fiscal stances to world interest rate shocks. This finding may be due to the fact that most debt in these countries—except Russia, perhaps—is contracted on concessional terms with long maturities, and interest payments are generally a small component of total spending.
These results underscore the need for further research, especially on the relative importance of the channels through which symmetric and non-symmetric commodity price shocks affect output.
The average responses shown in Figure 2 blur the differences between responses across tax regimes. Country-specific responses, not reported in this paper, display more distinct variations across tax regimes. In Figure 2, the differences between responses across tax regimes are more pronounced for output than for the fiscal aggregates. Intuitively, this result is mainly due to the additional effects of changes in taxes and spending on output (through θ2 and θ3 in Equation (3)), following the commodity price shock.
The approach enables inferences on the likelihood of estimated responses exceeding some predetermined levels—this yields the probabilities that we discuss in the next section. We also infer the level of the responses at any given (say, α1) significance level, yielding the expression “α1-significance level” of these responses.
This approach is widely used in the structural VAR literature to estimate confidence bands for simulated impulse responses. It assumes, however, that the impulse responses are independently distributed through time, which in a strict econometric sense is not precise. Hence, the confidence bands should not be interpreted as the usual confidence intervals, but rather as indications of uncertainty around parameter estimates. This is precisely how we use the simulated bands in this paper—to derive probabilities of exceeding fiscal targets and the α1-significance levels of the relevant fiscal variables.
In line with the focus of the paper, we include the price of oil in the index to capture the direct impact of changes in these prices on tax receipts—and indirectly through the oil price elasticity of output.