they adopted such rules. Nevertheless, there is evidence that some features of a second generation of fiscal rules—such as the use of cyclically adjusted targets and well-defined escape clauses, combined with strong legal and enforcement arrangements—have been associated with reduced procyclicality (Bova, Carcenac, and Guerguil 2014). The country cases examined in Section VI suggest that fiscal rules or SWFs are most effective in achieving their stated objectives when they are well-designed, closely linked to broader policy objectives, and supported by strong institutions and political commitment.

Armed with the insights from the correlates of fiscal procyclicality established above, the remainder of this section uses cross-country regressions to identify the main drivers of fiscal procyclicality in commodity exporters.<sup>11</sup> The dependent variable is the correlation between the annual percentage changes of real government spending and real GDP. The explanatory variables are intended to capture the four explanations for the existence of procyclical fiscal policy described above: capital account openness (measured by an index of financial openness); political economy factors (measured by an index of political constraints, which reflects the extent to which policy changes are inhibited by institutional and political factors); macroeconomic stability (measured by the standard deviation of output); and institutional quality (measured by an index of control of corruption).

The coefficients of each of these four variables are statistically significant and three of the four have the expected sign (Table 3). More open capital accounts and better control of corruption are estimated to have helped reduce fiscal procyclicality while greater output volatility has been associated with higher procyclicality. However, the coefficient of the political constraints index does not have the expected sign, suggesting either that the “voracity effect” did not hold or that the political constraints index fails to capture it. The variables are jointly significant when combined and explain about 18 percent of procyclical behavior across countries.<sup>12</sup>

**Robustness checks** : In line with Lane (2003), GDP per capita, size of the public sector relative to GDP, and openness (sum of exports and imports as a percentage of GDP) are used as controls in the regression, one at a time. GDP per capita is significant at the 5 percent level but the two other control variables are not significant. In all three cases, the F-test for the joint significance of the four relevant explanatory variables is significantly different from zero at least at the 10 percent level.

Cross-country regressions are also used to analyze the role of institutional variables in driving fiscal cyclicality, as highlighted by the correlations reported in the previous section. The roles of SWFs and fiscal rules are also explored. To capture SWFs, a dummy variable is included that takes the value of 1 if a country has an SWF, and 0 otherwise. SWFs can play an important role in reducing procyclicality by promoting the accumulation of government savings during commodity price booms, to be drawn down to some extent during price slumps (Asik 2017). The results show that greater government stability, better law and order, and the presence of SWFs and fiscal rules have all tended to reduce fiscal procyclicality (Table 4).<sup>13</sup> Overall, the analysis therefore provides empirical evidence that better institutions are

> 11 For an empirical analysis of the drivers of fiscal procyclicality in OECD countries, see Lane (2003). For an analysis of the role of financial and institutional variables, see Calderón and Schmidt-Hebbel (2008) and Calderón, Duncan, and Schmidt-Hebbel (2010). Ilzetzki (2011) provides a novel political economy explanation based on successive governments disagreeing on the desired distribution of public spending and examines different theories of procyclicality by running numerical simulations in calibrated models.

> 12 In line with Lane (2003), and to check the robustness of our results, GDP per capita, size of the public sector relative to GDP, and openness (the sum of exports and imports as a share of GDP) were added as controls, one at a time. While GDP per capita was significant at the 5 percent level, the two other control variables were not. In all three cases, the F-test for the joint significance of the three relevant explanatory variables was significantly different from zero at least at the 10 percent level.

> 13 Although fiscal rules may reduce procyclicality, the existence of fiscal procyclicality may prompt policy makers to adopt fiscal rules. To account for this potential endogeneity, instrumental variable estimation (two-stage least squares) is used with bureaucracy quality (from the PRS database) as an instrument.

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