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Why Do More Polarized Countries Run More Procyclical Fiscal Policy?

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Author Info

  • Jaejoon Woo

    (The Organisation for Economic Cooperation and Development (OECD) and DePaul University)

Abstract

We study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances-being expansionary in good times and contractionary in bad times. We develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias. We then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality, even after controlling for other determinants from existing theories. We also find a strong negative impact of fiscal procyclicality on economic growth. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 91 (2009)
Issue (Month): 4 (November)
Pages: 850-870

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Handle: RePEc:tpr:restat:v:91:y:2009:i:4:p:850-870

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Cited by:
  1. Claeys, Peter & Maravalle, Alessandro, 2010. "Fiscal Policy and Economic Stability: Does PIGS stand for Procyclicality In Government Spending?," DFAEII Working Papers 2010-11, University of the Basque Country - Department of Foundations of Economic Analysis II.
  2. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(5), pages 735-754.
  3. Elizabeth A. Stanton, 2012. "The Tragedy of Maldistribution: Climate, Sustainability, and Equity," Sustainability, MDPI, Open Access Journal, vol. 4(3), pages 394-411, March.
  4. Ridha Nouira & Khalid Sekkat, 2010. "Desperately Seeking the Positive Impact of Undervaluation on Growth," Working Papers, Economic Research Forum 560, Economic Research Forum, revised Oct 2010.
  5. Richard McManus & F Gulcin Ozkan, 2012. "On the consequences of procyclical fiscal policy," Discussion Papers, Department of Economics, University of York 12/34, Department of Economics, University of York.
  6. Barseghyan, Levon & Battaglini, Marco & Coate, Stephen, 2013. "Fiscal policy over the real business cycle: A positive theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2223-2265.
  7. Ilkin Aliyev, 2012. "Is Fiscal Policy Procyclical in Resource-Rich Countries?," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp464, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  8. Pierre Mandon, 2014. "Evaluating Treatment Effect and Causal Effect of Fiscal Rules on Procyclicality," Working Papers, HAL hal-01015439, HAL.
  9. Andrew Abbott & Philip Jones, 2013. "Procyclical government spending: a public choice analysis," Public Choice, Springer, Springer, vol. 154(3), pages 243-258, March.
  10. Makkonen, Teemu, 2013. "Government science and technology budgets in times of crisis," Research Policy, Elsevier, Elsevier, vol. 42(3), pages 817-822.
  11. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," IMF Working Papers, International Monetary Fund 14/45, International Monetary Fund.
  12. Abbott, Andrew & Jones, Philip, 2012. "Intergovernmental transfers and procyclical public spending," Economics Letters, Elsevier, Elsevier, vol. 115(3), pages 447-451.

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