# **_3.2 Cyclical properties during good times and bad times_**

Does the cyclicality of fiscal policy vary during good times and bad times? In order to capture possible asymmetries during the economic cycle, we split the sample based on the values of the cyclical component of real GDP —that is, positive (above the trend) and negative (below the trend). Table 2 tests whether the behavior of the cyclical component of government consumption differs when real economic activity is above or below the trend (i.e. expansions and recessions).

The least squares estimates show that government consumption tends to be procyclical in both good times and bad times in developing countries. For industrial countries, on the other hand, government consumption is slightly procyclical only during expansions. However, Sub-Saharan Africa is the only region where the degree of pro-cyclicality during recessions is larger than the one during expansions.

Accounting for the likely endogeneity of the business cycles, fiscal policy tends to be procyclical during expansions across all developing country groups. Among these groups, Sub-Saharan Africa exhibits the largest degree of procyclicality. The coefficient is positive, significant and greater than one —which implies that government consumption expands more than proportionally in good times. During downturns, SubSaharan Africa is the only region with a positive —although not statistically significant— coefficient estimate for the business cycle. In other regions, government consumption behaves countercyclically during bad times —although the coefficient estimate is statistically significant only for industrial countries.<sup>13</sup> Asymmetries along the business cycles emerge from implementing fiscal policies in an environment that is also affected by short-sighted considerations. In the case of Sub-Saharan Africa, we find procyclicality during expansions and acyclicality during recessions. Additionally, the magnitude of the sensitivity of fiscal policy to business cycles is greater during expansions than during recessions (1.593 vs. 0.918). Fluctuations in the business cycle are accompanied by a rising government consumption to output ratio over time. The quantitative importance of this mechanisms, as pointed out by Hercowitz and Michel Strawczynski (2004), is proxied by the ratcheting coefficient 0.675 (=1.593 -0.918).

It is likely that different factors shape a procyclical fiscal policy response during good times and bad times. In an expansion, political pressures and social needs boost government expenditures, particularly in countries with low levels of development. In downturns, the government needs funding to conduct countercyclical policies —either from its own savings or from financial markets— in a context of declining revenues. Industrial countries, emerging market economies, and some developing countries have access to international financial markets, which means that these countries can borrow to partially offset the economic consequences during the contraction periods. The pattern of fiscal policy cyclicality observed in Sub-Saharan Africa might respond to the higher demands during the expansion periods and nonnegligible borrowing constraints in downturns.

# **_3.3 How has the cyclical stance of fiscal policy changed in recent years?_**

This section tests whether the cyclical behavior of fiscal policy in Sub-Saharan Africa has changed over time —notably, in recent years. We conduct a recursive test of structural break along the fiscal policy

> 13 These are preliminary results that may suffer from the weak instrument problem since _the Kleibergen-Paap-F statistic_ is relatively low in some developing regions for certain periods.

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