Why is Fiscal Policy Often Procyclical?

52 Pages Posted: 9 Aug 2005

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Guido Tabellini

Bocconi University - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2005

Abstract

Many countries, especially developing ones, follow procyclical fiscal policies, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.

Suggested Citation

Alesina, Alberto F. and Tabellini, Guido, Why is Fiscal Policy Often Procyclical? (August 2005). Harvard Institute of Economic Research Discussion Paper No. 2090, CESifo Working Paper Series No. 1556, Available at SSRN: https://ssrn.com/abstract=780225 or http://dx.doi.org/10.2139/ssrn.780225

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

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Guido Tabellini

Bocconi University - Department of Economics ( email )

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