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The political economy of fiscal procyclicality

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  • Lim, Jamus Jerome

Abstract

It is well-recognized that fiscal spending in developing countries tends to display significant procyclicality (increased spending during expansions and vice versa), in contravention of rational stabilization policy. Theoretical explanations have relied on either financial access or political-economic factors to justify this phenomenon. In this paper, we model the fiscal-output relationship as a dcc-garch process, and inquire whether debt or political economy constraints play a comparatively more important role in conditioning this correlation. Our evidence favors a positive effect from political economy, with weaker and more mixed results pertaining to financial access. Somewhat surprisingly, we also find that politics-induced procyclicality appears to be driven by advanced economies, and fiscal rules exacerbate procyclical tendencies.

Suggested Citation

  • Lim, Jamus Jerome, 2020. "The political economy of fiscal procyclicality," European Journal of Political Economy, Elsevier, vol. 65(C).
  • Handle: RePEc:eee:poleco:v:65:y:2020:i:c:s0176268020300781
    DOI: 10.1016/j.ejpoleco.2020.101930
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    More about this item

    Keywords

    Fiscal procyclicality; Political economy; Financial access; DCC-GARCH models;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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