Fiscal Transparency and Procyclical Fiscal Policy
Asger Lau Andersen and
Lasse Holbøll Westh Nielsen
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Asger Lau Andersen: Department of Economics, University of Copenhagen
Lasse Holbøll Westh Nielsen: Department of Economics, University of Copenhagen
No 2010-01, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics
This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.
Keywords: fiscal transparency; fiscal policy; procyclicality; business cycle; political economy (search for similar items in EconPapers)
JEL-codes: D72 E32 E62 (search for similar items in EconPapers)
Pages: 36 pages
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