The political economy of fiscal procyclicality (original) (raw)

Explaining the Procyclicality of Fiscal Policy in Developing Countries

Center for Research in Economic Development and International Trade (CREDIT) Research Paper, 2011

The procyclicality of fiscal policy that is prevalent in developing countries and emerging markets is well known. Its explanation is less clear. Recently, social inequality and the combination of corruption and democracy have been suggested as alternatives to the traditional explanation of these countries’ exposure to boom-bust cycles in international credit markets. Differences in methodological approach are also partly responsible for diverging empirical results. In this paper, competing hypotheses are tested on a comprehensive set of measures of the cyclicality of fiscal policy. The evidence for corruption and democracy is stronger than for social inequality or net foreign debt, but the interpretation of this result is less obvious, since the index of corruption is closely correlated with poor credit ratings. In OECD countries, by contrast, the cyclicality of fiscal policy largely reflects the strength of automatic stabilizers.

Procyclicality of Fiscal Policy in Emerging Countries: The Cycle is the Trend

SSRN Electronic Journal, 2000

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Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries

2013

We provide evidence that fiscal policy in resource-rich countries is strongly procyclical. The empirical analysis reveals that on average real government consumption in these countries tends to significantly rise (fall) in good (bad) times. To control for endogeneity we use an instrumental variable for GDP growth that arises naturally, namely the growth in commodity prices of the main natural resource export. We also find that fiscal policy procyclicality is lower in more democratic regimes, and that operating a sovereign wealth fund is more successful in limiting fiscal policy procyclicality than introducing fiscal rules.

Is Fiscal Policy Procyclical in Resource-Rich Countries

SSRN Electronic Journal, 2000

We analyze fiscal policy procyclicality in resource-rich countries. We obtain a strong Ushaped relationship between the procyclicality of government capital expenditures and the resource richness measure comprised of the mineral exports share in total merchandise exports for developing countries. Such a relationship is robust to different methodologies and various checks. We consider two hypotheses: first, the political economy hypothesis, and second, the borrowing constraints hypothesis. Empirical observations appear to be consistent with the hypotheses. We build a model able to generate a U-shape effect combining political economy and borrowing constraint hypotheses. We argue that with a model of simple settings such a U-shape relationship can be obtained and interpreted.

Fiscal Policy Procyclicality in Resource-Rich Countires

2013

This study analyzes fiscal policy procyclicality in resource-rich countries. A strong U-shaped relationship between the procyclicality of government capital expenditures and the resource richness measure comprised of the mineral exports share in total merchandise exports is obtained for developing countries. Such a relationship is robust to different methodologies and various checks. Two hypotheses have been considered: first, the political economy hypothesis, and second, the borrowing constraints hypothesis. Empirical observations appear to be consistent with the hypotheses. A model has been built that is able to generate a U-shape effect combining political economy and borrowing constraint hypotheses. Arguably, with a model of simple settings such a Ushape relationship can be obtained and interpreted.

On graduation from fiscal procyclicality

Journal of Development Economics, 2013

In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country's ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of …scal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.

The cyclicality of fiscal policy in South Asia

Argumenta Oeconomica

The paper empirically analyses the role of macroeconomic, political and institutional variables in determining cyclical patterns of government revenues, expenditures and fiscal balance in South Asian Countries (SACs). Panel regression analysis is conducted for the period 1980 to 2013. The findings support existing literature about developing countries demonstrating that fiscal policies are strongly procyclical in SACs and there is significant evidence of persistence. Revenues have decreased and expenditures have increased with output cycle which has deteriorated the fiscal balance. This indicates that fiscal balance is procyclical with output cycle in SACs and this procyclicality increases during good times. The results suggest that SACs can conduct counter cyclical fiscal policies if they stabilize output, control inflation and structural shocks, have deep financial markets, high financial openness, have few veto players in the political procedures and have stronger institutions. These results are robust to alternative measures of output cycle and model specifications.

The impact of budgetary and political institutions on fiscal cyclicality: Evidence from Egypt

Journal of Governance and Regulation, 2021

We investigate the cyclicality of fiscal policy in Egypt during the period of 1976–2019 with a focus on how budgetary and political institutions affect fiscal performance during economic cycles. We define new variables for budgetary and political institutions and incorporate them in a vector error correction model (VECM) and impulse response functions (IRFs) analysis. While current and capital spending are proven to behave procyclically, revenues respond countercyclically during business cycles. Poor political and budgetary institutions have a negative impact on the primary deficit in a way that led to procyclical behaviour in fiscal policy in the long run. We recommend reinforcing the Golden Rule and changing the nature of the electoral system to a party-based to strengthen the role of parliament in keeping the government accountable

Fiscal Policy for Growth and Development

A Developing Country Perspective, 2012

Developing countries entered the recent crisis in a much stronger macroeconomic and financial position than in the past. In general, they had much smaller fiscal and current account deficits, lower inflation, higher international reserves, more flexible exchange rates, lower public and external debt, and less financial sector vulnerability (Canuto and Giugale 2010; Kose and Prasad 2010). 2 Among middle-income countries, the median ratio of general government debt to gross domestic product (GDP) almost halved, while in a sample of low-income countries (LICs), it fell even more precipitously, aided by substantial debt relief (figure 1).