On Graduation from Fiscal Procyclicality

Jeffrey A. Frankel, Carlos A. Végh, Guillermo Vuletin

NBER Working Paper No. 17619
Issued in November 2011
NBER Program(s):   IFM

In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country’s ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of …scal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.

Published: Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2013. "On graduation from fiscal procyclicality," Journal of Development Economics, Elsevier, vol. 100(1), pages 32-47.

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This paper was revised on July 25, 2012

Acknowledgments and Disclosures

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