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Empirical Economics

, Volume 41, Issue 3, pp 725–737 | Cite as

Cyclicality of fiscal policy and the shadow economy

  • Deniz Çiçek
  • Ceyhun ElginEmail author
Article

Abstract

A survey of recent literature on cyclical properties of fiscal policy reveals that fiscal policy is procyclical in many developing countries whereas it is countercyclical in developed ones. However, there is no consensus on what drives the difference in this specific cyclical property of fiscal policy. Using cross-section and panel data sets for 78 countries we document that procyclicality of fiscal policy is more pronounced in countries with a larger size of the shadow economy. We also show that policies reducing the size of the shadow economy lead to a less (more) procyclical (countercyclical) fiscal response to shocks.

Keywords

Fiscal policy Informal sector Cyclicality 

JEL Classification

E26 H30 

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Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of MinnesotaMinneapolisUSA
  2. 2.Department of EconomicsBogazici UniversityIstanbulTurkey

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