From Fiscal Cyclicality to Fiscal Stress: The Role of Asymmetric Public Consumption Rigidities in Emerging Markets

Daniel Riera-Crichton, Pilar Ruiz Orrico and Guillermo Javier Vuletin

No 10984, Policy Research Working Paper Series from The World Bank

Abstract: Macroeconomic textbooks warn that procyclical public spending can amplify economic volatility and cause fiscal stress. However, the latter risks materialize only when governments fail to reduce spending during downturns as much as they increase it during booms. This study investigates asymmetries in the cyclicality of public consumption and finds that emerging markets exhibit “downward rigidity”: they boost spending during upswings but do not effectively cut back during downturns. In contrast, advanced economies maintain steady levels of public consumption regardless of economic conditions, making them effectively acyclical. Downward rigidity in public consumption not only paves the way for fiscal stress when the economy slows, but also leads to sustained growth in the size of the state.

Date: 2024-11-25
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