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Why Is Fiscal Policy Procyclical in MENA Countries?

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  • Sarra Ben Slimane

    () (University of Sousse)

  • Moez Ben Tahar

Abstract

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.

Suggested Citation

  • Sarra Ben Slimane & Moez Ben Tahar, 2010. "Why Is Fiscal Policy Procyclical in MENA Countries?," Working Papers 566, Economic Research Forum, revised 11 Jan 2010.
  • Handle: RePEc:erg:wpaper:566
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    References listed on IDEAS

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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, June.
    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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    Cited by:

    1. Jean-Louis Combes & Rasmané Ouedraogo, 2014. "Does Pro-cyclical Aid Lead to Pro-cyclical Fiscal Policy? An Empirical Analysis for Sub-Saharan Africa," Working Papers halshs-01084600, HAL.

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