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We investigate the fiscal response to exogenous commodity price shocks in Emerging Market and Developing Economies (EMDEs), which are crucial for understanding domestic business cycles. We challenge the reliance on unconditional correlations for policy analysis, advocating for a nuanced approach that considers conditional dynamics specific to commodity shocks. We make three significant contributions: Firstly, we demonstrate that fiscal authorities in EMDEs increase spending and moderately raise

We investigate the fiscal response to exogenous commodity price shocks in Emerging Market and Developing Economies (EMDEs), which are crucial for understanding domestic business cycles. We challenge the reliance on unconditional correlations for policy analysis, advocating for a nuanced approach that considers conditional dynamics specific to commodity shocks. We make three significant contributions: Firstly, we demonstrate that fiscal authorities in EMDEs increase spending and moderately raise taxes in response to commodity shocks, leading to a counter-cyclical fiscal stance. Secondly, our empirical findings align with the optimal policy response to export price shocks in a multi-good small open economy model. Lastly, we reveal heterogeneity in fiscal responses across countries, with stronger institutional frameworks exhibiting counter-cyclical policies, whereas weaker institutions persist with pro-cyclical approaches.