Numerical Overview of Fiscal Cyclicality

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.