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Fiscal Transparency and Procyclical Fiscal Policy

  • Asger Lau Andersen

    (Department of Economics, University of Copenhagen)

  • Lasse Holbøll Westh Nielsen

    (Department of Economics, University of Copenhagen)

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    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.

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    Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 2010-01.

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    Length: 36 pages
    Date of creation: Mar 2010
    Date of revision:
    Handle: RePEc:kud:epruwp:10-01
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