New Evidence on the Cyclicality of Fiscal Policy

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Current expenditure upswings in good times and capital expenditure downswings in bad times?: new evidence from developing countries 

“…For example, Calderon, Easterly and Servén 1 The literature on fiscal asymmetry is almost exclusively concentrated on OECD countries (Balassone and Francese, 2004;Hercowitz and Strawczynski, 2004). Exceptions include Carneiro and Garrido (2015) and Balassone and Kumar (2007) for developing countries in general, and Clements, Faircloth and Verhoeven (2007) and Gavin and Perotti (1997) for Latin America in particular. 2 See Arze del Granado, Gupta and Hadjdenberg (2013) and Akitoby et al (2006) for important exceptions.…”

“…While fiscal asymmetry in developing countries has been studied in the past, extant studies have concentrated on either total (Carneiro and Garrido, 2015;Balassone and Kumar, 2007) or social spending such as education and health (Arze del Granado, Gupta and Hadjdenberg, 2013). Previous research that has looked at the cyclical behavior of current/capital spending has not addressed whether procyclicality originates specifically in good or bad times (Akitoby et al, 2006), or has done so for only a subset of economies (oil-exporting countries) in the context of studying exchange rate dynamics (Arezki and Imsail, 2013).…”

Terms of trade volatility, government spending cyclicality, and economic growth

“…Frankel et al () show that the country‐specific government spending cyclicality coefficients are negatively correlated with measures of institutional quality . Carneiro and Garrido () document that the findings in Frankel et al are robust to expanding the sample to 180 countries during 1980 to 2012. Further, Carneiro and Garrido () document that the findings in Frankel et al () are robust to using different filtering methods and allowing for structural breaks.…”

Taming Volatility

“…The robustness of these results was tested by investigating whether the graduating classes changed significantly if the sample period was split in different points in time. We did this by running tests of structural break for the time series of real government expenditures for each country and splitting the sample when a structural break was identified (see Carneiro and Garrido (2015) for details). After following this approach we confirmed only one Caribbean country actually classified as an established graduate (Guyana) and 3-4 countries moving away from pro-cyclical to counter-cyclical policies, compared to 1-3 countries falling back into pro-cyclical fiscal policies.…”

“…A structural break on the series for the latter may be indicative of changes in fiscal stance. Source: Carneiro and Garrido (2015) based on IMF, WEO.…”