event results (see figure 1 below) and that are known for their strong tax revenue elasticities to production (elasticities estimated to be greater than unity). However, as noted by Perotti (2007), among the papers that have studied the cyclical behavior of fiscal policy in developing countries (see e.g. Kaminsky et al., 2004, and Gavin and Perotti, 1997), it seems widely accepted that fiscal policy in these countries is typically pro-cyclical, i.e. the budget deficit is positively correlated with economic growth. 8 Hence, according to this procyclical effect, if a growth event occurs in the year following a fiscal event, this should increase the deficit, and hence weaken the probability of observing fiscal events followed by a growth event (recall that an increase in discretionary fiscal expenditure associated with an increase in the fiscal deficit does not qualify as a fiscal event). One might even suspect our definition of fiscal event to underestimate, for the developing countries, the correlation with subsequent growth.

Third, even though the GFS makes an effort at classifying extra-budget items consistently, as already mentioned, data is limited to the Consolidated Central Government while a more suitable aggregate would be based on data for the Consolidated General Government.<sup>9</sup> Given the quality of the data, we have refrained from trying to tune the coarse constraint on deficit improvement imposed here. A natural extension would be to replace conditions (ii) and (iii) by a formal test on sustainability.<sup>10</sup> Finally, we would not want to exclude countries that sought fiscal space through highly confessional borrowing even if this led to an increase in their deficit (since, despite high grant percentage as a share of the loan, such loans are not treated as grants).<sup>11</sup> This suggests that one might wish to take an estimate of the grant component of such loans and include that portion in government revenue thereby relaxing the budgetary constraint. However, there is no data on the grant component of these loans. As an alternative, we redefined our fiscal event with a fourth condition allowing 8 Several explanations have been advanced to explain the procyclicality of fiscal policy in developing countries. Among others, Gavin and Perotti (1997) have argued that developing countries face credit constraints that prevent them from borrowing with slow growth. Tornell and Lane (1999) show that competition for a common pool of funds among different units (ministries, provinces) leads to the so-called “voracity effect” whereby expenditure could actually exceed a given windfall. Alesina and Tabellini (2005) show that procyclicality is an optimal behavior in the presence voters with imperfect information and corrupt politicians. 9 86% of the observations rely on data consolidated at the central government sector level and the remainder 14% at the budget central government level. See annex A.1.3 for further discussion.

10 Since the sensitivity analysis to the selection of parameter values reported in annex A.3 gives a relatively small change in the number of fiscal events over a broad range of parameter values, we refrained from experimenting with a formula that would link the value of the deficit level to the level of indebtedness, or from more formal tests of sustainability such as those used by Chalk and Henning (2001). Moreover these tests have only be done for OECD countries and given the lack of availability in indebtedness data, these improvements in the fiscal event definition seem hardly worth attempting in our sample. 11 We thank Peter Heller for this suggestion.

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