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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- 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.
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- Alberto Alesina & Guido Tabellini, 2005.
"Why Is Fiscal Policy Often Procyclical?,"
297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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?," Levine's Bibliography 784828000000000465, UCLA Department of Economics.
- 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.
- Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy often Procyclical?," CESifo Working Paper Series 1556, CESifo Group Munich.
- 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.
- Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004.
"When it rains, it pours: Procyclical capital flows and macroeconomic policies,"
13883, University Library of Munich, Germany.
- 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.
- Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
- 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.
- Fabrizio BALASSONE & Maura FRANCESE, "undated". "Cyclical Asymmetry in Fiscal Policy, Debt Accumulation and the Treaty of Maastricht," EcoMod2004 330600014, EcoMod.
- Jordi Gali & Roberto Perotti, 2003.
"Fiscal Policy and Monetary Integration in Europe,"
NBER Working Papers
9773, National Bureau of Economic Research, Inc.
- Douglas Staiger & James H. Stock, 1997.
"Instrumental Variables Regression with Weak Instruments,"
Econometric Society, vol. 65(3), pages 557-586, May.
- Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
- Mark Aguiar & Gita Gopinath, 2004.
"Emerging Market Business Cycles: The Cycle is the Trend,"
NBER Working Papers
10734, National Bureau of Economic Research, Inc.
- 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.
- Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
- 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.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2004. "Fiscal Policy and Financial Depth," NBER Working Papers 10532, National Bureau of Economic Research, Inc.
- Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
- 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.
- Enrique Alberola & José M. Montero, 2006. "Debt sustainability and procyclical fical policies in Latin America," Working Papers 0611, Banco de España;Working Papers Homepage.
- Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
- 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.
- 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.
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