Can Automatic Government Spending Be Procyclical?

Galeano, Luciana; Izquierdo, Alejandro; Puig, Jorge; Végh, Carlos A.; Vúletin, Guillermo

doi:10.3386/w28521

Cited by 9 publications

(2 citation statements)

References 15 publications

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“…There is a vast literature on the cyclicality of fiscal policy. One recent contribution isGaleano et al (2021).…”

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confidence: 99%

Searching for a Safe Harbor: Fiscal Policy Responses in Small Island Developing States

Clayton,

Rosenblatt

2024

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Over the last two decades, there has been a growing empirical literature to test whether governments fiscal policies systematically respond to changes in the level of debt-to-GDP. Most research has focused on advanced and emerging economies and has overlooked developing countries, especially small island developing states (SIDS). While Caribbean fiscal reaction functions have been estimated in the literature, this paper fills a gap by broadly including all SIDS in the analysis. We find that weak fiscal sustainability has been maintained, but mostly due to the more recent period of the analysis, and with the exclusion of the outlier of São Tomé and Principe. The magnitudes of the coefficient of the increasing primary balance in response to increasing debt-to-GDP is in line with estimates from the literature including, for example, past work on Caribbean SIDS. Two novel findings are that extreme weather events are indeed associated with deteriorations in the primary fiscal balance, and that primary balances may respond pro-cyclically to economic booms and acyclically or counter-cyclically to economic busts.

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“…There is a vast literature on the cyclicality of fiscal policy. One recent contribution isGaleano et al (2021).…”

mentioning

confidence: 99%

Searching for a Safe Harbor: Fiscal Policy Responses in Small Island Developing States

Clayton,

Rosenblatt

2024

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“…This trend was reinforced as a result of policy responses to the global financial crisis: about two thirds of the fiscal expansion during 2008/9 observed in Latin America was on average accounted for by increases in two items: public wages/salaries and transfers(Ardanaz and Izquierdo, 2020). On the procyclical behavior of social transfers and education/health expenditures, see for exampleGaleano et al (2021) and Arze del Granado, Gupta and Hadjdenberg (2013), respectively.14Ardanaz and Izquierdo (2022) show that when output is below potential, Latin American countries exhibit the largest drop in capital spending in a sample of over 100 emerging and developing countries spanning six different regions.…”

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confidence: 99%

Why Do Voters Support Procyclical Fiscal Policies? Experimental Evidence from Latin America

Ardanaz¹,

Hübscher²,

Keefer³

et al. 2023

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Governments often pursue procyclical fiscal policies, even though they reduce voter welfare. Is this because voters actually prefer procyclical policies? The analysis in this paper exploits the first individual-level evidence from an original survey of 12,000 respondents in 8 countries across Latin America. Prior research links support for procyclical policy to imperfect voter information but does not explore voter knowledge of the composition of public spending increases and cuts in response to positive and negative shocks. We present experimental evidence that less informed individuals are more supportive of procyclical policy. Previous work also explores how trust in politicians influences fiscal policy preferences. We find that those who distrust politicians support acyclical fiscal policies: they are skeptical that they will benefit from higher government spending after positive shocks and be spared the costs of spending cuts after negative shocks. Finally, the evidence supports untested assumptions about voter patience and risk aversion. Patient respondents care more about the future costs of procyclical policy and risk-averse respondents about its higher volatility; support for acyclical policy is correspondingly higher among both groups.

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Synchronization and cyclicality of social spending in economic crises

2022

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This paper expands the analysis of the cyclical characteristics of social spending by providing information on its joint behaviour across OECD countries. With this aim we propose the use of dynamic factor analysis and recursive models to estimate synchronization and cyclicality of social policies within a broad perspective. By considering the synchronization of social spending it is possible to assess the short-run characteristics of the joint response to changes in the economic cycle. We find that synchronization of social spending was only possible for advanced economies, achieving the highest countercyclical stabilization effect during the Global Financial Crisis. Emerging market economies are not able to join the synchronized response, maintaining independent and, in most cases, procyclical stances in the behaviour of their social policies.

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Can Automatic Government Spending Be Procyclical?

Cited by 9 publications

References 15 publications

Searching for a Safe Harbor: Fiscal Policy Responses in Small Island Developing States

Searching for a Safe Harbor: Fiscal Policy Responses in Small Island Developing States

Why Do Voters Support Procyclical Fiscal Policies? Experimental Evidence from Latin America

Synchronization and cyclicality of social spending in economic crises

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