well as employ a variety of de-trending methods to generally confirm the results in Frankel, Vegh, and Vuletin (2013). They show that among 104 developing countries in their sample, about 40% to 50% (depending on the de-trending method) followed or switched to countercyclical fiscal policies during the 1990-2010 period. In comparison, among the 14 Caribbean countries, only two to five of them followed the same course during the 1990-2010 period.

There is a number of reasons for such a behavior by developing countries. One explanation is that frictions in the international credit markets prevent developing countries from borrowing in bad times. As a result, developing countries’ governments are forced to lower spending during recessions (Gavin and Perotti (1997), Caballero and Krishnamurthy (2004), Mendoza and Oviedo (2006)). Other explanation for pro-cyclical government expenditures rely on political economy reasons which suggest that during good times governments face political pressures and temptations to keep spending high and run fiscal deficits. Lastly, delays in the implementation and execution of fiscal policies in developing economies also contribute to fiscal policy pro-cyclicality in these countries.

Aside from their cyclical properties, government revenues and expenditures are also found to be significantly more volatile in developing countries compared to developed economies. For instance, Male (2010) finds that in a large sample of developed and developing countries, on average, government expenditure is 4.5 times more volatile than output, and government revenue is almost four times more volatile than output. In contrast, in developed countries, the volatilities of government expenditures and revenues are comparable to the volatility of output. Overall, the pro-cyclicality of fiscal policy in developing countries, together with the high volatility of fiscal variables, suggest that in these countries fiscal policy may aggravate economic fluctuations rather than having a stabilizing effect on them. This, in turn, may have a depressing effect on the level of economic activity in the economy, inhibiting factor accumulation, and therefore, economic growth.

# **3. Stylized facts about growth and macroeconomic volatility in the OECS**

We start with the statistical analysis of economic growth and business cycles in the member countries of the Organization of Eastern Caribbean States (OECS). We also include Barbados in the empirical analysis given its proximity and similarity to the OECS countries. In particular, we document in detail the growth experience of these countries over the past several decades; the business cycle facts in these economies, such as the volatility of output, consumption, investment, trade balance, and real interest rates; the cyclicality of these variables with output and interest rate, as well as their persistence; and the properties of fiscal policy in these countries, with a particular focus on its cyclical characteristics.

All data are from the International Monetary Fund’s _World Economic Outlook_ (WEO) database and cover the period 1980-2014 at annual frequency. To transform the data into real terms, all nominal quantities are deflated by the GDP deflator. Interest rate is real lending rate obtained as the difference between the lending rate and the consumer price index (CPI) inflation rate. We also considered an effective interest rate on government debt computed as the ratio of general government interest expenditures and gross debt. The two rates are highly correlated, with the average correlation across countries equal to 0.89. As a result, the stylized facts are very similar 6