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Fiscal Transparency and Procyclical Fiscal Policy

Author

Listed:
  • Asger Lau Andersen

    (Department of Economics, University of Copenhagen)

  • Lasse Holbøll Westh Nielsen

    (Department of Economics, University of Copenhagen)

Abstract

This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.

Suggested Citation

  • Asger Lau Andersen & Lasse Holbøll Westh Nielsen, 2010. "Fiscal Transparency and Procyclical Fiscal Policy," EPRU Working Paper Series 2010-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:10-01
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    More about this item

    Keywords

    fiscal transparency; fiscal policy; procyclicality; business cycle; political economy;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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