a positive correlation indicates procyclicality, while a negative correlation indicates countercyclicality.<sup>6</sup> These correlations are calculated for 182 countries using annual data for 1980-2020.

Economies are placed into two groups—“commodity exporters” and “commodity importers”—by applying the classification criteria used in World Bank (2022). An economy is classified as a commodity exporter if, on average in 2017–19, either its combined exports of all commodities accounted for 30 percent or more of its total exports or its exports of any single commodity accounted for 20 percent or more of its total exports. Economies are excluded if they reached either threshold only because of reexports (imports that were exported without being changed). Based on these criteria, 92 economies are classified as commodity exporters of which 87 are EMDEs and five are advanced economies. Commodity importers are economies not classified as commodity exporters (Table 1). The panel is unbalanced due to lack of data for some countries for the whole sample period.

# **II.1 Basic features of procyclicality**

The analysis of correlations produces four stylized facts. First, in the period 1980-2020, fiscal policy in EMDEs has been procyclical while that in advanced economies has been acyclical (Figure 2.A). The correlation between the cyclical components (derived using the Hodrick-Prescott filter) of real government expenditure and real GDP for EMDEs is 0.40, while that for advanced economies is slightly negative. Second, although fiscal policy in both commodity exporters and commodity importers has been procyclical among all EMDEs in the sample, commodity exporters are 30 percent more procyclical than commodity importers on average (Figure 2.B). The correlation between the cyclical components of real government spending and real GDP for commodity exporters is 0.46 compared with 0.36 for commodity importers, with both coefficients as well as the difference between them being statistically significant. Commodity exporters tended to have more procyclical fiscal policy than commodity importers regardless of their major commodity export—agricultural products, metals, or energy. This procyclical behavior has been widespread across all EMDE regions (Figure 2.C).

Third, the degree and nature of fiscal procyclicality have varied across country income groups. Fiscal procyclicality in LICs and countries in fragile and conflict-affected situations (FCS) was higher than in lowerand upper-middle income countries, while in high-income countries fiscal policy was countercyclical (Figure 2.D). Fourth. fiscal procyclicality has declined over the past four decades. To examine the evolution of fiscal procyclicality, the sample is split into two subperiods: before and after 2006. This division reflects the observed increase in the willingness and ability of countries to pursue countercyclical fiscal policies following the 2007–09 global financial crisis (Alvarez and De Gregorio 2014; Végh and Vuletin 2014). Fiscal procyclicality in commodity exporters has been falling over the past decade-and-a-half. Nevertheless, procyclicality in commodity exporters still prevails and has fallen much less than in commodity-importing countries (which are, on average, acyclical since 2006) (Figure 2.E). The fraction of countries running procyclical fiscal policies has declined over the past few decades. This decline was more pronounced for commodity importers (from 33 percent in the mid-1990s to 24 percent in 2021) compared with commodity exporters (from 40 percent in the mid-1990s to 36 percent in 2021) (Figure 2.F).

# **II.2 Determinants of fiscal procyclicality**

To assess how fiscal cyclicality has varied with macroeconomic and institutional features of countries, this section first compares fiscal cyclicality across different groups of EMDEs. It then presents a cross-country

> 6 For details about this measure, see Frankel, Végh, and Vuletin (2013) and Kaminsky, Reinhart, and Végh (2004). The analysis here uses the Hodrick-Prescott filter to detrend the time series. The results are robust to the use of alternative filters, such as the Baxter-King filter. Results are also robust to the use of nonparametric filters, as documented by Carneiro and Garrido (2016) and Kaminsky, Reinhart, and Végh (2004).

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