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.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price includes VAT (USA)
Tax calculation will be finalised during checkout.
Aizenman J, Gavin M, Hausmann R (2000) Optimal tax and debt policy with endogenously imperfect creditworthiness. J Int Trade Econ Dev 9: 367–395
Alesina A, Campante FR, Tabellini GR (2008) Why is fiscal policy often procyclical?. J Eur Econ Assoc 6(5): 1006–1030
Battaglini M, Coate S (2008) Fiscal policy over the real business cycle: a positive theory. Princeton University working paper
Chari VV, Christiano L, Kehoe P (1991) Optimal fiscal and monetary policy: some recent results. Federal Reserve Bank of Minneapolis Staff Report, 147
Gavin M, Perotti R (1997) Fiscal policy in Latin America. In: Bernanke B, Rotemberg J (eds) NBER macroeconomics annual 1997. MIT Press, Cambridge, MA
Hall RE, Jones CI (1999) Why do some countries produce so much more output per worker than others?. Q J Econ 114: 83–116
Ihrig J, Moe KS (2004) Lurking in the shadows: the informal sector and government policy. J Dev Econ 73(2): 541–557
Ilzetzki E (2009) Rent-seeking distortions and fiscal procyclicality. LSE working paper
Johnson S, Kaufman D, Zoido-Lobaton P (1998) Regulatory discretion and the unofficial economy. Am Econ Rev 88: 387–392
Kaminski G, Reinhart C, Vegh CA (2004) When it rains it pours: procyclical capital flows and macroeconomic policies. In: Gertler M, Rogoff K (eds) NBER macroeconomic annual 2004. MIT Press, Cambridge, MA
Lane P (2003) The cyclical behaviour of fiscal policy: evidence from the OECD. J Public Econ 87(12): 2661–2675
Lane P, Tornell A (1999) Voracity and growth. Am Econ Rev 89: 22–46
LaPorta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15: 222–279
Lederman D, Loayza HN, Soares RR (2005) Accountability and corruption: political institutions matter. Econ Politics 17(3): 1–35
Lucas R Jr, Stokey NL (1983) Optimal fiscal and monetary policy in an economy without capital. J Monet Econ 12(1): 55–93
Riascos A, Végh CA (2003) Procyclical government spending in developing countries: the role of capital market imperfections. Working Paper
Roca JCC, Moreno DC, Sanchez JEG (2003) Underground economy and aggregate fluctuations. Span Econ Rev 3: 41–53
Schneider F, Buehn A, Montenegro CE (2010) Shadow economies all over the World: new estimates for 162 countries from 1999 to 2007. Working paper
Talvi E, Vegh CA (2005) Tax base variability and procyclical fiscal policy. J Dev Econ 78: 156–190
About this article
Cite this article
Çiçek, D., Elgin, C. Cyclicality of fiscal policy and the shadow economy. Empir Econ 41, 725–737 (2011). https://doi.org/10.1007/s00181-010-0409-0
- Fiscal policy
- Informal sector