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Redistributive Fiscal Policies and Business Cycles in Emerging Economies

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Abstract

Government expenditures are pro-cyclical in emerging markets and counter-cyclical in developed economies. We show this pattern is driven by differences in social transfers. Transfers are more counter-cyclical and comprise a larger portion of spending in developed economies compared to emerging. In contrast, government expenditures on goods and services are quite similar across the two. In a small open economy model, we find disparate social transfer policies can account for more than a half of the excess volatility of consumption relative to output in emerging economies. We analyze how differences in tax policy and the nature of underlying inequality amplify or mitigate this result.

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  • Amanda M. Michaud & Jacek Rothert, 2017. "Redistributive Fiscal Policies and Business Cycles in Emerging Economies," Working Papers (Old Series) 1709, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1709
    DOI: 10.26509/frbc-wp-201709
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    Cited by:

    1. Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Debt Restructurings: Public Capital and Fiscal Constraint Tightness," School of Economics Discussion Papers 0323, School of Economics, University of Surrey.
    2. Jacek Rothert, 2020. "Optimal federal redistribution during the uncoordinated response to a pandemic," Departmental Working Papers 64, United States Naval Academy Department of Economics.
    3. Arthur Mendes & Steven Pennings, 2025. "One Rule Fits All? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 55, January.
    4. Stelios Sakkas & Petros Varthalitis, 2021. "Public Debt Consolidation and its Distributional Effects," Manchester School, University of Manchester, vol. 89(S1), pages 131-174, September.
    5. Jacek Rothert & Ryan Brady & Michael Insler, 2020. "The Fragmented United States of America: The impact of scattered lock-down policies on country-wide infections," Departmental Working Papers 65, United States Naval Academy Department of Economics.
    6. Helder Ferreira de Mendonça & Matheus Souza Peçanha, 2020. "Fiscal management performance and local economic development: evidence from a large emerging economy," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(3), pages 641-659, July.
    7. Leonel Muinelo-Gallo & Ronald Miranda, 2020. "The Behaviour of Social Transfers over the Business Cycle: Empirical Evidence of Uruguay," Hacienda Pública Española / Review of Public Economics, IEF, vol. 233(2), pages 25-54, June.
    8. Mohimont, Jolan, 2022. "Welfare effects of business cycles and monetary policies in a small open emerging economy," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    9. Bruno Pires Tiberto & Helder Ferreira de Mendonça, 2023. "Effects of Sustainable Monetary and Fiscal Policy on FDI Inflows to EMDE Countries," Working Papers Series 575, Central Bank of Brazil, Research Department.
    10. Sakkas, Stelios & Varthalitis, Petros, 2018. "The (intertemporal) equity-efficiency trade-off of fiscal consolidation," MPRA Paper 90983, University Library of Munich, Germany.
    11. Andrew, Kevin & Majerbi, Basma & Rhodes, Ekaterina, 2022. "Slouching or speeding toward net zero? Evidence from COVID-19 energy-related stimulus policies in the G20," Ecological Economics, Elsevier, vol. 201(C).
    12. de Mendonça, Helder Ferreira & Tiberto, Bruno Pires, 2024. "Are prudent monetary and fiscal policy drivers of FDI inflows?," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(1).
    13. Jacek Rothert, 2021. "Optimal federal transfers during uncoordinated response to a pandemic," GRAPE Working Papers 58, GRAPE Group for Research in Applied Economics.
    14. Jacek Rothert, 2020. "International Business Cycles In Emerging Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 753-781, May.
    15. Muinelo-Gallo, Leonel, 2022. "Business cycles and redistribution: The role of government quality," Economic Systems, Elsevier, vol. 46(4).
    16. Jacek Rothert, 2022. "Optimal federal transfers during uncoordinated response to a pandemic," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 1124-1153, October.
    17. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    18. Froemel, Maren & Paczos, Wojtek, 2024. "Imperfect financial markets and the cyclicality of social spending," European Economic Review, Elsevier, vol. 167(C).
    19. Jacek Rothert & Ryan Brady & Michael Insler, 2020. "Local containment policies and country-wide spread of Covid-19 in the United States: an epidemiological analysis," GRAPE Working Papers 48, GRAPE Group for Research in Applied Economics.
    20. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
    21. Cusato Novelli, Antonio & Barcia, Giancarlo, 2021. "Sovereign Risk, Public Investment and the Fiscal Policy Stance," Journal of Macroeconomics, Elsevier, vol. 67(C).

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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