“When it rains, it pours”: Fiscal policy, credit constraints and business cycles in emerging and developed economies

Krastina Dzhambova

Journal of Macroeconomics, 2021, vol. 69, issue C

Abstract: Fiscal procyclicality, meaning co-movement between government expenditure and macroeconomic fundamentals, is an important feature of business cycle dynamics for emerging and poor economies. I estimate a panel SVAR to investigate the reasons for fiscal procyclicality. The analysis sheds light on the role of external financial constraints in shaping fiscal policy. My findings suggest that the response of emerging governments to output fluctuations is similar to that of developed governments. However, emerging governments curtail spending in response to increases in the sovereign borrowing rate, which forces their consumption expenditure to act more procyclically. Using counterfactual analysis, I show that the key forces behind fiscal procyclicality are the sensitivity of government spending to international borrowing costs and the procyclical nature of these costs for emerging economies.

Keywords: Fiscal procyclicality; Country risk premium; International business cycles; General government consumption expenditure (search for similar items in EconPapers)
JEL-codes: E62 F41 G15 H50 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:69:y:2021:i:c:s0164070421000264

DOI: 10.1016/j.jmacro.2021.103319

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