NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?

Ethan Ilzetzki, Carlos A. Vegh

NBER Working Paper No. 14191
Issued in July 2008
NBER Program(s):   IFM

A large empirical literature has found that fiscal policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical. The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical fiscal policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy. To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea that procyclical fiscal policy in developing countries is in fact truth and not fiction. We also find evidence that fiscal policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours."

download in pdf format
   (396 K)

email paper

This paper is available as PDF (396 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14191

Users who downloaded this paper also downloaded these:
Mountford and Uhlig w14551 What are the Effects of Fiscal Policy Shocks?
Feldstein w14684 Rethinking the Role of Fiscal Policy
Talvi and Vegh w7499 Tax Base Variability and Procyclical Fiscal Policy
Ilzetzki, Mendoza, and Vegh w16479 How Big (Small?) are Fiscal Multipliers?
Alesina and Ardagna w15438 Large Changes in Fiscal Policy: Taxes Versus Spending
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us