Skip to main content
SpringerLink
Log in

Numerical Overview of Fiscal Cyclicality

  • Chapter
  • First Online:
Procyclical Fiscal Policy

Part of the book series: SpringerBriefs in Economics ((BRIEFSDBJRS))

  • 284 Accesses

Abstract

Recently, some research has demonstrated that a fiscal policy runs procyclically in most developing countries. Preceding studies have proposed two explanations for this: (i) imperfection in international credit markets that prevents developing countries from borrowing during bad times and (ii) political distortion to accelerate fiscal expansion during bad times. In this chapter, we review preceding empirical literature and summarize important points to be considered. The theoretical literature will be surveyed in the next chapter. Then, we analyze fiscal cyclicality by ourselves while considering these points. Our three types of simple analyses show the following: (i) fiscal procyclicality does exist, even if we carefully address the causality problem; (ii) not only developing countries but also some industrialized countries may implement fiscal policies procyclically; and (iii) the possibility of a procyclical fiscal policy is higher when the government function is weak.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
eBook
USD 16.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 16.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    Nevertheless, Alesina et al. (2008) pointed out that the quality of data on the composition of government spending was very poor for developing countries.

  2. 2.

    Unfortunately, figures for the correlation of these fiscal components of central governments are not presented in Frankel et al. (2013).

  3. 3.

    Unfortunately, we could not discuss some studies here such as Manasse (2006), Jaimovich and Panizza (2007), Égert (2010), and Carneiro and Garrido (2015). Ilzetzki (2011) will be reviewed in the next chapter.

  4. 4.

    We cannot know whether this government consumption is or is not that of the central governments in the paper.

  5. 5.

    These include the original 20 countries plus Australia, Finland, Japan, and New Zealand.

  6. 6.

    The number of lags was selected as 1 when we follow the Schwartz information criterion, but the choice of lags does not affect the results.

  7. 7.

    We have other political and democracy indices such as the Worldwide Governance Indicators and the International Country Risk Guide dataset, which Frankel et al. (2013) used. To compare the relationship between the correlation and each of these political indices would be interesting, but we have kept this for future study.

  8. 8.

    We collected this rating data from the website of CountryEconomy.com (https://countryeconomy.com/). Incidentally, Alesina et al. (2008) adopted the rating from S&P and not Fitch Ratings.

  9. 9.

    We calculate this average on a 365-day basis.

  10. 10.

    Alesina et al. (2008) stated that the results become inconclusive upon adding the proxy for the degree of financial constraints and political factors simultaneously.

References

  • Alesina, A., Campante, F., & Tabellini, G. (2008). Why is fiscal policy often procyclical? Journal of the European Economic Association, 6(5), 1006–1036.

    Article  Google Scholar 

  • Aizenman, J., Gavin, M., & Hausmann, R. (1996). Optimal tax and debt policy with endogenously imperfect creditworthiness. NBER Working Paper, No. 5558.

    Google Scholar 

  • Aizenman, J., Gavin, M., & Hausmann, R. (2000). Optimal tax and debt policy with endogenously imperfect creditworthiness. The Journal of International Trade & Economic Development, 9(4), 367–395.

    Article  Google Scholar 

  • Barro, R. (1979). On the determination of public debt. Journal of Political Economy, 87(5), 940–971.

    Article  Google Scholar 

  • Blanchard, O., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics, 117(4), 1329–1368.

    Article  Google Scholar 

  • Carneiro, F., & Garrido, L. (2015). New evidence on the cyclicality of fiscal policy. The World Bank Policy Research Working Paper Series, Working Paper, No. 7293.

    Book  Google Scholar 

  • Égert, B. (2010). Fiscal policy reaction to the cycle in the OECD: Pro- or counter-cyclical? OECD Economics Department Working Papers, No. 763.

    Google Scholar 

  • Frankel, J. A., Végh, C. A., & Vuletin, G. (2013). On graduation from fiscal procyclicality. Journal of Development Economics, 100(1), 32–47.

    Article  Google Scholar 

  • Gavin, M., & Perotti, R. (1997). Fiscal policy in Latin America. NBER Macroeconomics Annual, 12, 11–70.

    Article  Google Scholar 

  • Gavin, M., Hausmann, R., Perotti, R., & Talvi, E. (1996). Managing fiscal policy in Latin America and the Caribbean: Volatility, procyclicality and limited creditworthiness. Inter-American Development Bank Office of the Chief Economist Working Paper, No. 326.

    Google Scholar 

  • Henisz, W. (2000). The institutional environment for economic growth. Economics and Politics, 12(1), 1–31.

    Article  Google Scholar 

  • Holtz-Eakin, D., Newey, W., & Rosen, H. S. (1988). Estimating vector autoregressions with panel data. Eonometrica, 56(6), 1371–1395.

    Article  Google Scholar 

  • Ilzetzki, E. (2011). Rent-seeking distortions and fiscal procyclicality. Journal of Development Economics, 96(1), 30–46.

    Article  Google Scholar 

  • Ilzetzki, E., & Végh, C. A. (2008). Procyclical fiscal policy in developing countries: Truth or fiction? NBER Working Paper, No. 14191.

    Google Scholar 

  • Jaimovich, D., & Panizza, U. (2007). Procyclicality or reverse causality? Inter-American Development Bank Research Department Working Paper, No. 599.

    Google Scholar 

  • Kaminsky, G., Reinhart, C., & Végh, C. A. (2004). When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, 19, 11–82.

    Article  Google Scholar 

  • Kekic, L. (2007). The economist intelligence unit’s index of democracy. http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf.

  • Lane, P. R. (2003). The cyclical behaviour of fiscal policy: Evidence from the OECD. Journal of Public Economics, 87(12), 2661–2675.

    Article  Google Scholar 

  • Manasse, P. (2006). Procyclical fiscal policy: Shocks, rules, and institutions—A view from MARS. IMF Working Paper, WP/06/27.

    Article  Google Scholar 

  • Riascos, A., & Végh, C. A. (2003). Procyclical government spending in developing countries: The role of capital market imperfections. UCLA and Banco Republica, Colombia: Mimeo.

    Google Scholar 

  • Stein, E., Talvi, E., & Gristani, A. (1999). Institutional arrangements and fiscal performance: The Latin American experience. NBER Working Paper, No. 6358.

    Google Scholar 

  • Talvi, E., & Végh, C. (2000). Tax base variability and procyclical fiscal policy. NBER Working Paper, No. 7499.

    Google Scholar 

  • Talvi, E., & Végh, C. (2005). Tax base variability and procyclical fiscal policy in developing countries. Journal of Development Economics, 78(1), 156–190.

    Article  Google Scholar 

  • Tornell, A., & Lane, P. R. (1999). The voracity effect. American Economic Review, 89(1), 22–46.

    Article  Google Scholar 

  • Végh, C. A., & Vuletin, G. (2015). How is tax policy conducted over the business cycle? American Economic Journal: Economic Policy, 7(3), 327–370.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. National Graduate Institute for Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo, Japan

    Toshihiro Ihori

  2. Kwansei Gakuin University, 2-1 Gakuen, Sanda, Hyogo, Japan

    Keigo Kameda

  3. Research Institute of Capital Formation, Development Bank of Japan, Chiyoda-ku, Japan

    Toshihiro Ihori & Keigo Kameda

Authors
  1. Toshihiro Ihori
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Keigo Kameda
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Toshihiro Ihori .

Appendix: Abbreviations and Length of Time Series by Country

Appendix: Abbreviations and Length of Time Series by Country

Abbreviations

Country name

Beginning date of series

GDP

Gov’t Cons.

ARG

Argentina

Q1-1993

Q1-2004

AUS

Australia

Q1-1960

Q1-1995

AUT

Austria

Q1-1988

Q1-1995

BEL

Belgium

Q1-1995

Q1-1995

BRA

Brazil

Q1-1996

Q1-1996

CAN

Canada

Q1-1961

Q1-1995

CHL

Chile

Q1-2003

Q1-2003

COL

Colombia

Q1-2000

Q1-2000

CRI

Costa Rica

Q1-1991

Q1-1995

CZE

Czech Republic

Q1-1996

Q1-1996

DNK

Denmark

Q1-1995

Q1-1995

EST

Estonia

Q1-1995

Q1-1995

FIN

Finland

Q1-1990

Q1-1995

FRA

France

Q1-1960

Q1-1995

DEU

Germany

Q1-1991

Q1-1995

GRC

Greece

Q1-1995

Q1-1995

HUN

Hungary

Q1-1995

Q1-1995

ISL

Iceland

Q1-1997

Q1-1997

IND

India

Q2-2011

Q2-2011

IDN

Indonesia

Q1-1990

Q1-1995

IRL

Ireland

Q1-1997

Q1-1997

ISR

Israel

Q1-1995

Q1-1995

ITA

Italy

Q1-1981

Q1-1995

JPN

Japan

Q1-1994

Q1-1995

KOR

Korea

Q1-1960

Q1-1995

LVA

Latvia

Q1-1995

Q1-1995

LTU

Lithuania

Q1-1995

Q1-1995

LUX

Luxembourg

Q1-1995

Q1-1995

MEX

Mexico

Q1-1993

Q1-1995

NLD

Netherlands

Q1-1988

Q1-1995

NZL

New Zealand

Q1-1988

Q1-1995

NOR

Norway

Q1-1978

Q1-1995

POL

Poland

Q1-1995

Q1-1995

PRT

Portugal

Q1-1995

Q1-1995

RUS

Russia

Q1-2003

Q1-2003

SVK

Slovak Republic

Q1-1997

Q1-1997

SVN

Slovenia

Q1-1995

Q1-1995

ZAF

South Africa

Q1-1960

Q1-1995

ESP

Spain

Q1-1995

Q1-1995

SWE

Sweden

Q1-1960

Q1-1995

CHE

Switzerland

Q1-1980

Q1-1995

TUR

Turkey

Q1-1998

Q1-1998

GBR

United Kingdom

Q1-1960

Q1-1995

USA

United States

Q1-1960

Q1-1995

  1. Note Ending date of the series is 2016: 4 for all countries

Rights and permissions

Reprints and permissions

Copyright information

© 2018 Development Bank of Japan

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Ihori, T., Kameda, K. (2018). Numerical Overview of Fiscal Cyclicality. In: Procyclical Fiscal Policy. SpringerBriefs in Economics(). Springer, Singapore. https://doi.org/10.1007/978-981-13-2995-1_1

Download citation

  • DOI: https://doi.org/10.1007/978-981-13-2995-1_1

  • Published:

  • Publisher Name: Springer, Singapore

  • Print ISBN: 978-981-13-2994-4

  • Online ISBN: 978-981-13-2995-1

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation