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

  • Michel Strawczynski
  • Joseph Zeira

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.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 624.

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Date of creation: Feb 2011
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Handle: RePEc:chb:bcchwp:624
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  1. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
  2. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  3. Magda E. Kandil & Hanan Morsy, 2010. "Fiscal Stimulus and Credibility in Emerging Countries," IMF Working Papers 10/123, International Monetary Fund.
  4. Vahagn Galstyan and Philip R. Lane, 2008. "The Composition of Government Spending and the Real Exchange Rate," The Institute for International Integration Studies Discussion Paper Series iiisdp257, IIIS.
  5. Gabriela Inchauste & Bernardin Akitoby & Benedict J. Clements & Sanjeev Gupta, 2004. "The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries," IMF Working Papers 04/202, International Monetary Fund.
  6. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers 7271, C.E.P.R. Discussion Papers.
  7. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
  8. Hercowitz, Z. & Strawczynski, M., 2001. "Fiscal Policy Dynamics with a Public-Debt Guideline," Papers 2001-1, Tel Aviv.
  9. Riccardo Fiorito, 1997. "Stylized Facts of Government Finance in the G-7," IMF Working Papers 97/142, International Monetary Fund.
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