External Commodity Shocks and the Insulating Role of Fiscal Policy on Real Output: Evidence from a Commodity-Exporting Economy

This study investigates the role of fiscal policy in stabilising resource-rich economies
vulnerable to external commodity shocks, with a specific focus on Mongolia. We analyse the
effects of various external commodity shocks on Mongolia’s economy and find that fiscal
policy’s responses to these shocks have been counter-cyclical. Additionally, we construct
policy counterfactuals to examine the insulating role of fiscal policy on real domestic output.
The findings reveal that counter-cyclical fiscal measures, particularly government expenditure,
and to a lesser extent, government revenue, played an important role in Mongolia’s response
to external commodity shocks.