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Current expenditure upswings in good times and public investment downswings in bad times? New evidence from developing countries

Martín Ardanaz and Alejandro Izquierdo ()

Journal of Comparative Economics, 2022, vol. 50, issue 1, 118-134

Abstract: Anecdotal evidence suggests that policymakers usually cannot resist the temptation of spending more on current expenditure (e.g., wages, transfers) in good times and mostly pick public investment to adjust during bad times. In this paper, we answer the following questions: do current expenditures and public investment react differently to the business cycle? If so, why? In a sample of more than 100 developing countries and 30 developed countries observed between 1980 and 2014, a new empirical regularity specific to developing countries is identified: upswings are associated with increases in current primary expenditures only, while public investment falls and current spending remains acyclical during downturns. Evidence is also presented that this asymmetrical response is more pronounced in countries where incumbent politicians face shorter time horizons and weak institutions. Other types of determinants traditionally discussed in the literature have limited explanatory power.

Keywords: Cyclicality; Public spending; Fiscal asymmetry; Institutions (search for similar items in EconPapers)
JEL-codes: D72 E32 E62 H50 P48 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jce.2021.06.002

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Handle: RePEc:eee:jcecon:v:50:y:2022:i:1:p:118-134