Evolution of the effects of mineral commodity prices on fiscal fluctuations: empirical evidence from TVP-VAR-SV models for Peru

Abstract

This paper studies the evolution of the effects of fluctuations in mineral commodity prices on fiscal variables, especially those associated with fiscal revenues, in Peru by means of VAR models with time-varying parameters and stochastic volatility (TVP-VAR-SV). We compare different alternative specifications using the marginal likelihood and the deviance information criterion, which show that it is essential to consider stochastic volatility. It is found that an increase of 1% in the growth of mineral commodity prices generates increases of around 1.5 and 2.5% in the growth of taxes from mining and mining canon, respectively, thus reflecting a remarkable sensitivity of these variables to external shocks. In turn, these responses are increasingly more pronounced until reaching a peak around 2009 and then decrease, which is in line with the dynamics of the commodities boom. In the variance decomposition, the importance of shocks in mineral commodity prices in explaining fluctuations in taxes from mining and mining canon increases in line with the increasing tendency of mineral prices until the Great Recession, where shocks in mineral commodity prices explain between 40 and 50% of fluctuations in taxes from mining and mining canon, and then it is reduced. This shows the importance of allowing time-varying parameters and stochastic volatility in contrast with a standard VAR.