Oil Shocks and Fiscal Policy Procyclicality in Angola: Assessing the Role of Asymmetries and Institutions

Abstract

The aim of this article is to examine procyclicality in Angola, assess whether it behaves asymmetrically over the oil cycle, and test the hypothesis that institutions and fiscal rules can moderate procyclicality. Received wisdom suggests that in resource‐rich economies, fiscal policy tends to be procyclical albeit improvements in the past decades due to institutional reforms. Similar evidence is available for oil‐rich economies; however, we know little about how procyclicality behaves over the oil cycle; that is, whether spending (and revenue) grows faster during oil‐market booms, than during downturns. Further, evidence on institutions and fiscal rules in oil‐exporting economies is still ambiguous. We bridge both gaps by examining fiscal policy procyclicality in Angola, one of the largest oil‐producers in Africa, and a country that has experienced an intense process of institutional reforms since 2002. Therefore, it is an ideal candidate for our study. We use data for the 2004–2014 period to estimate a threshold vector error correction model that extends vector autoregressive and vector correction methods used up to date. Our results indicate that revenue and spending are generally procyclical to oil shocks, that revenue is more procyclical during booms, and that institutional quality, net inflows, financial openness, and fiscal rules affect procyclicality.