Procyclical fiscal policy in developing countries
Subtitle: truth or fiction?
By: Ethan Ilzetzki, Carlos A. Vegh.
Contributors: Végh Gramont, Carlos A., 1958-; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 14191; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 14191.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "A large empirical literature has found that fiscal policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical.  The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom.  This has sparked a growing theoretical literature that attempts to explain such a puzzle.  Some authors, however, have suggested that procyclical fiscal policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy.  To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods.  We find overwhelming evidence to support the idea that procyclical fiscal policy in developing countries is in fact truth and not fiction.  We also find evidence that fiscal policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours.""--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/1/2008.

Includes bibliographical references.

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Mode of access: World Wide Web.