On Graduation from Fiscal Procyclicality

36 Pages Posted: 24 Nov 2011 Last revised: 30 Nov 2011

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Guillermo Vuletin

Brookings Institution

Date Written: November 2011

Abstract

In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal 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 fiscal policy.

Suggested Citation

Frankel, Jeffrey A. and Vegh, Carlos A. and Vuletin, Guillermo, On Graduation from Fiscal Procyclicality (November 2011). NBER Working Paper No. w17619, Available at SSRN: https://ssrn.com/abstract=1964164

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER)

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Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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University of Maryland - Department of Economics ( email )

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University of California at Los Angeles ( email )

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HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guillermo Vuletin

Brookings Institution ( email )

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