IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Procyclicality or Reverse Causality?

  • Ugo Panizza
  • Dany Jaimovich

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4508.

in new window

Date of creation: Mar 2007
Date of revision:
Handle: RePEc:idb:wpaper:4508
Contact details of provider: Postal: 1300 New York Avenue, NW, Washington, DC 20577
Phone: 202-623-1000
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Paolo Manasse, 2006. "Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars," IMF Working Papers 06/27, International Monetary Fund.
  2. 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.
  3. Ricardo J. Caballero & Arvind Krishnamurthy, 2004. "Fiscal Policy and Financial Depth," NBER Working Papers 10532, National Bureau of Economic Research, Inc.
  4. 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.
  5. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  6. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  7. Alberto Alesina & Filipe Campante & Guido Tabellini, . "Why is Fiscal Policy Often Procyclical?," Working Paper 248206, Harvard University OpenScholar.
  8. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  9. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  10. 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.
  11. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  12. 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.
  13. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  14. 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, June.
  16. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:idb:wpaper:4508. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Monica Bazan)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.