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On the consequences of procyclical fiscal policy

  • Richard McManus
  • F Gulcin Ozkan

There is widespread evidence that procyclical fiscal policies have been prevalent in developing countries and often in some industrial nations. It is therefore surprising that, in contrast to the wealth of studies on the sources of procyclical policy, potential consequences of such seemingly sub-optimal policies have been largely ignored in the existing literature. By utilizing a comprehensive set of indicators from 114 countries for 1950-2010, we aim to address the following important question: does it matter whether a country adopts a procyclical fiscal policy stance rather than a countercyclical one? Our results produce a resounding yes to this question. We find that fiscally procyclical countries have lower rates of economic growth, higher rates of output volatility and higher rates of inflation.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 12/34.

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Date of creation: Dec 2012
Date of revision:
Handle: RePEc:yor:yorken:12/34
Contact details of provider: Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  3. Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2012. "On Graduation from Fiscal Procyclicality," Working Paper Series rwp12-011, Harvard University, John F. Kennedy School of Government.
  4. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
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  6. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
  7. 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.
  8. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-63, July.
  9. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2007. "Governance Matters VI: Aggregate and Individual Governance Indicators, 1996-2006," Policy Research Working Paper Series 4280, The World Bank.
  10. Jaejoon Woo, 2009. "Why Do More Polarized Countries Run More Procyclical Fiscal Policy?," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 850-870, November.
  11. Lane, Philip R. & Tornell, Aaron, 1998. "Why aren't savings rates in Latin America procyclical?," Journal of Development Economics, Elsevier, vol. 57(1), pages 185-199, October.
  12. Philippe Aghion & Ioana Marinescu, 2008. "Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 251-278 National Bureau of Economic Research, Inc.
  13. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
  14. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
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