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

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  • Michel Strawczynski
  • Joseph Zeira

Abstract

This paper uses the Aguiar and Gopinath (2007) methodology in order to estimate whether “the cycle is the trend” in 23 emerging markets and 22 OECD economies. These estimates are then used to test whether procyclical fiscal policy in emerging countries is due to persistent shocks to per-capita GDP. We find support for this hypothesis. While both developed and emerging countries have a procyclical policy for investment expenditure, procyclicality is evident in emerging countries also for government consumption and transfers. Over the period of increasing globalization after the 1990s, these are signs of a reduction in the extent of procyclical expenditure policy in emerging countries. We also find that, in countries with high levels of foreign direct investment, procyclicality is milder.

Suggested Citation

  • Michel Strawczynski & Joseph Zeira, 2011. "Procyclicality of Fiscal Policy in Emerging Countries: the Cycle is the Trend," Working Papers Central Bank of Chile 624, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:624
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    2. Kari Grenade & Allan Wright, 2014. "Public Spending in Selected Caribbean Countries," Public Finance Review, , vol. 42(4), pages 487-510, July.
    3. Gnangnon, Sèna Kimm, 2021. "Tax reform and public debt instability in developing countries: The trade openness and public revenue instability channels," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 54-67.
    4. Ryszard Piasecki & Erico Wulf B, 2014. "Fiscal Policy Rules: Evidence From Chilean Economy," Review of Business and Finance Studies, The Institute for Business and Finance Research, vol. 5(2), pages 45-54.
    5. Gheorghița DINCĂ & Marius Sorin DINCĂ & Bardhyl DAUTI & Mirela Camelia BABA & Cătălina POPIONE, 2020. "Cyclicality of Fiscal Policy in the European Union," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 75-96, March.
    6. Sena KIMM Gnangnon, 2020. "Export Product Diversification and Fiscal Space Volatility in Developing Countries: Exploring the Economic Growth Volatility Channel," Economics Bulletin, AccessEcon, vol. 40(3), pages 1837-1854.
    7. Brückner, Markus & Gradstein, Mark, 2014. "Government spending cyclicality: Evidence from transitory and persistent shocks in developing countries," Journal of Development Economics, Elsevier, vol. 111(C), pages 107-116.
    8. Mr. Sampawende J Tapsoba & Mr. Robert C York & Neree C.G.M. Noumon, 2016. "Can Statistical Capacity Building Help Reduce Procyclical Fiscal Policy in Developing Countries?," IMF Working Papers 2016/209, International Monetary Fund.
    9. Michel Strawczynski, 2022. "Cyclicality of Tax Expenditures: The Case of Israel," Bank of Israel Working Papers 2022.04, Bank of Israel.
    10. I. Bukina S. & И. Букина С., 2018. "Политика Финансовой Консолидации И Развитие Экономики В Условиях Внешних Шоков // The Policy Of Financial Consolidation And Economic Development In The Face Of External Shocks," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 22(1), pages 6-21.

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