On the consequences of procyclical fiscal policy

There is widespread evidence that procyclical fiscal policies have been prevalent in developing countries and often in some industrial nations. It is therefore surprising that, in contrast to the wealth of studies on the sources of procyclical policy, potential consequences of such seemingly sub-optimal policies have been largely ignored in the existing literature. By utilizing a comprehensive set of indicators from 114 countries for 1950-2010, we aim to address the following important question: does it matter whether a country adopts a procyclical fiscal policy stance rather than a countercyclical one? Our results produce a resounding yes to this question. We find that fiscally procyclical countries have lower rates of economic growth, higher rates of output volatility and higher rates of inflation.