Procyclicality or Reverse Causality?
There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear.
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10734, National Bureau of Economic Research, Inc.
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- Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
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CEPR Discussion Papers
3933, C.E.P.R. Discussion Papers.
- James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
- Alberto Alesina & Guido Tabellini, 2005.
"Why is Fiscal Policy often Procyclical?,"
CESifo Working Paper Series
1556, CESifo Group Munich.
- Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Levine's Bibliography 784828000000000465, UCLA Department of Economics.
- Alberto Alesina & Filipe Campante & Guido Tabellini, "undated". "Why is Fiscal Policy Often Procyclical?," Working Paper 248206, Harvard University OpenScholar.
- Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research.
- Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy Often Procyclical?," NBER Working Papers 11600, National Bureau of Economic Research, Inc.
- Paolo Manasse, 2006. "Procyclical Fiscal Policy; Shocks, Rules, and Institutions: A View From Mars," IMF Working Papers 06/27, .
- Fabrizio BALASSONE & Maura FRANCESE, "undated".
"Cyclical Asymmetry in Fiscal Policy, Debt Accumulation and the Treaty of Maastricht,"
- Fabrizio Balassone & Maura Francese, 2004. "Cyclical asymmetry in fiscal policy, debt accumulation and the Treaty of Maastricht," Temi di discussione (Economic working papers) 531, Bank of Italy, Economic Research and International Relations Area.
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- Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, September.
- Enrique Alberola & Manuel Montero, 2006.
"Debt Sustainability and Procyclical Fiscal Policies in Latin America,"
ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION,
ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2006), pages 157-193, August.
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- Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
- Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2004. "Fiscal Policy and Financial Depth," NBER Working Papers 10532, National Bureau of Economic Research, Inc.
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