**_Figure 2_** _. Cyclical properties of Government Consumption Expenditure: proportion of countries by groups._

<!-- Start of picture text --> 1970-2014<br>100%<br>9%<br>Coutercyclical<br>80% 40%<br>62% 60%<br>60%<br>77% Acyclical<br>40%<br>60%<br>20% 38% 40%<br>14% Procyclical<br>0%<br>Sub-Saharan Africa Latin America Developing Asia Industrial Countries<br><!-- End of picture text --> _Note: The government final consumption expenditure and GDP are expressed in local currency at constant prices (source: UN-Statistics database). Their cyclical components are obtained using the Hodrick-Prescott filter. Countercyclical government consumption means that the correlation coefficient is negative and statistically significant at 5% level. It is procyclical when it is positive and significant, and acyclical when the coefficient is not statistically different from zero._ Next, we estimate the fiscal policy reaction function defined in equation (1) using least squares. The relationship between the cyclical components of the government consumption expenditure and real GDP is positive and statistically significant in all developing regions. The coefficient of real GDP cycle, however, is larger in Sub-Saharan Africa (Table 1). On the other hand, least squares estimates point to a nonsignificant relationship between government consumption and the business cycle.

The results are qualitatively similar when we account for the likely endogeneity of (the cyclical component of) real output. Our instrumental variables (IV) estimation shows that government consumption is still procyclical in Sub-Saharan Africa and Latin America —with the former group having the larger coefficient estimate. For developing Asia, the coefficient estimate of real GDP is still positive but fails to be statistically significant. When we account for endogeneity, the extent of procyclicality of government consumption in Sub-Saharan Africa is greater and twice as large as that in Latin America. Note that the estimates for the SSA region are the only ones where least squares exhibits a downward bias. This suggests that government consumption expenditure among SSA countries is ineffective in boosting short-run aggregate demand.

The lagged debt-to-GDP indicator has a negative coefficient across all regions, implying that higher debt levels tend to constrain fiscal policy. However, the coefficient is only significant for Latin American and industrial countries. The coefficient on the lagged cyclical component of government consumption has a positive sign for all country groups, except Sub-Saharan Africa. But after correcting for the potential endogeneity problem, this coefficient is only significant in the group of industrial countries. In SubSaharan Africa, this coefficient on the lagged dependent variable is negative and not significant. Note that we are working with deviation of government consumption expenditure with respect to its trend, thus a negative coefficient for its lagged variable would suggest an oscillating behavior of fiscal policy. That is, when the cyclical component of government consumption is below its trend in the previous period, it is more likely to be above the trend in the current period, suggesting variability in government spending.

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