On Graduation from Fiscal Procyclicality

Guillermo Vulentin, Carlos Vegh and Jeffrey Frankel

Scholarly Articles from Harvard Kennedy School of Government

Abstract: 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. In line with existing literature, we confirm the role of increased financial integration and lower output volatility in reducing overall procyclicality. In this paper, however, we focus on the role played by the quality of institutions. Indeed, the quality of institutions seems to be a key determinant of a country's ability to graduate. We provide a formal analysis, controlling for the endogeneity of institutions and other determinants of fiscal procyclicality, that strongly suggests that there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.

Date: 2012
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Citations: View citations in EconPapers (13)

Published in HKS Faculty Research Working Paper Series

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http://dash.harvard.edu/bitstream/handle/1/8694931/RWP12-011_Frankel.pdf (application/pdf)

Related works:
Journal Article: On graduation from fiscal procyclicality (2013)
Working Paper: On Graduation from Fiscal Procyclicality (2012)
Working Paper: On Graduation from Fiscal Procyclicality (2012)
Working Paper: On Graduation from Fiscal Procyclicality (2012)
Working Paper: On Graduation from Fiscal Procyclicality (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:hksfac:8694931

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