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Why Is Fiscal Policy Procyclical in MENA Countries?

Listed author(s):
  • Sarra Ben Slimane

    ()

    (University of Sousse)

  • Moez Ben Tahar
Registered author(s):

    The optimal fiscal policy is countercyclical, aiming to keep the output close to its potential. Nevertheless, it has been pointed out that developing countries are unable to run countercyclical fiscal policies. Several researchers have attributed these sub optimal fiscal policies to two groups of arguments. (i) The limited access to domestic or external funds may hinder the ability of government to pursue expansionary fiscal policy in bad time. (ii) The second group of factors explains that sub-optimal fiscal policies are associated with institutional theories. The standard argument suggests that countries pursuing poor fiscal policies also have weak institutions, widespread corruption, a lack of property rights and repudiation of contract. The main goal of this paper is to analyze empirically if the ability of MENA countries to conduct countercyclical fiscal policy is affected by the quality of their institutions, the nature of political regime and/or by the availability of financial resources either on the local or international capital markets. From our fiscal policy regression, we find that budget balance in MENA region is countercyclical. At the same time, total expenditure and total revenue are procyclical. We conclude that MENA countries are unable to run countercyclical fiscal policies if they have weak institutions, limited international access, a domestic credit market and democratic political regimes.

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    Paper provided by Economic Research Forum in its series Working Papers with number 566.

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    Length: 22
    Date of creation: 11 Jan 2010
    Date of revision: 11 Jan 2010
    Publication status: Published by The Economic Research Forum (ERF)
    Handle: RePEc:erg:wpaper:566
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    1. Paolo Manasse, 2006. "Procyclical Fiscal Policy; Shocks, Rules, and Institutions: A View From Mars," IMF Working Papers 06/27, International Monetary Fund.
    2. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
    3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    4. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
    5. John Thornton, 2007. "On The Cyclicality Of South African Fiscal Policy," South African Journal of Economics, Economic Society of South Africa, vol. 75(2), pages 258-264, 06.
    6. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
    7. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
    8. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
    9. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2004. "The role of credibility in the cyclical properties of macroeconomic policies in emerging economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(4), pages 613-633, December.
    10. Roberto Perotti, 1996. "Redistribution and Non-Consumption Smoothing in an Open Economy," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 411-433.
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