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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

Abstract: 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
Date: 2010-03
New Economics Papers: this item is included in nep-pol
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