In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical …scal policy. In sharp contrast, emerging and developing countries have followed procyclical …scal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country's ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of …scal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical …scal policy.JEL Classi…cation: E62, E32, E02, F41.

In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical …scal policy. In sharp contrast, emerging and developing countries have followed procyclical …scal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. In line with existing literature, we con…rm the role of increased …nancial integration and lower output volatility in reducing overall procyclicality. In this paper, however, we focus on the role played by the quality of institutions. Indeed, the quality of institutions seems to be a key determinant of a country's ability to graduate. We provide a formal analysis, controlling for the endogeneity of institutions and other determinants of …scal procyclicality, that strongly suggests that there is a causal link running from stronger institutions to less procyclical or more countercyclical …scal policy.JEL Classi…cation: E62, E32, E02, F41.

It is well known by now that government spending has typically been procyclical in developing economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and, hence, cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960–2013 that comprises corporate income, personal income, and value-added tax rates. We find that tax policy is acyclical in industrial countries but mostly procyclical in developing countries. (JEL E32, E64, H24, H25, O11, O23)

Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper estimates the size of the informal economy for 32 mainly Latin American and Caribbean countries in the early 2000s. Using a structural equation modeling approach, we find that a stringent tax system and regulatory environment, higher inflation, and dominance of the agriculture sector are key factors in determining the size of the informal economy. The results also confirm that a higher degree of informality reduces labor unionization, the number of contributors to social security schemes, and enrollment rates in education.