Introduction

The subject of this analysis is the academic paper "Commodity Prices and Fiscal Policy Design: Procyclical Despite a Rule" by Hilde C. Bjørnland and Leif Anders Thorsrud, published in 2019 in the Journal of Applied Econometrics (2019: 34: 161-180). This review will explore the methodology employed by Bjørnland and Thorsrud, the conclusions drawn from their research, and the implications these findings may have for comparable economies. The paper presents a significant contribution to an understanding of the effects of fiscal policy design on commodity-dependent economies and the complexities that such economies may face in maintaining fiscal discipline amidst the volatility of commodity prices.

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Methodology

Bjørnland and Thorsrud (2019) set out to analyze the role of procyclicality in fiscal policy design, particularly in the context of commodity-exporting countries. The research framework was grounded in a dynamic stochastic general equilibrium (DSGE) model, complemented by the elements of a commodity sector. It also included an exhaustive empirical strategy that implemented a structural multivariate frequency domain approach to identify cyclical properties of fiscal policy variables. The scholars carried out their research, focusing on the situation in Norway, one of the world's leading oil exporters.

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Main Findings

Bjørnland and Thorsrud (2019) discovered that the implementation of fiscal policy rules, specifically the spending of oil revenues in Norway, is indeed procyclical. However, the procyclicality did not have a mitigating impact on the cyclical movement of the economy for non-oil GDP. The research substantiated the argument that procyclical fiscal policy can contribute to a "Dutch disease" condition, a situation where an increase in revenues from natural resources could harm a country's other sectors.

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Discussion

The study conducted by Bjørnland and Thorsrud (2019) adds value to the understanding of the mechanisms of fiscal policies in resource-rich economies. There is a clear indication of procyclical fiscal policy in Norway despite the stated rule, which is a significant insight given Norway is often viewed as an exemplar in managing oil wealth. The findings may have significant implications for other resource-rich economies that are grappling with policy decisions regarding fiscal planning and resource usage.

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Conclusion

The insightful research carried out by Bjørnland and Thorsrud (2019) underlines the complex relationship between fiscal policies, commodity prices, and economic cycles. While the paper is focused on Norway, its conclusions may have far-reaching implications for other commodity-dependent economies. Further studies on this topic should explore the possibilities of mitigating procyclical fiscal policies in resource-rich economies to foster economic stability and growth.

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References

Bjørnland, H.C. and Thorsrud, L.A., 2019. Commodity prices and fiscal policy design: Procyclical despite a rule. Journal of Applied Econometrics, 34(2), pp.161-180.