Advertisement

Theory of Procyclical Fiscal Policy

  • Toshihiro IhoriEmail author
  • Keigo Kameda
Chapter
Part of the SpringerBriefs in Economics book series (BRIEFSECONOMICS)

Abstract

Contrary to conventional wisdom, recent research has demonstrated that in most developing countries, fiscal policy runs procyclically. In this chapter, after we review the conventional Keynesian and Neoclassical views, including the “tax smoothing” hypothesis framed by Barro (J Polit Econ 85:940–971, 1979), we describe the recent theoretical challenges that explain this fiscal procyclicality. These challenges can be categorized into two types: (i) imperfection in international credit markets that prevents developing countries from borrowing in bad times (Aizenman et al. in NBER Working Paper, No. 5558, 1996, J Int Trade Econ Dev 9:367–395, 2000; Riascos and Végh in Procyclical government spending in developing countries: the role of capital market imperfections, 2003), and (ii) political distortion to accelerate fiscal expansion (Tornell and Lane in Am Econ Rev 89:22–46, 1999; Talvi and Végh in J Dev Econ 78:156–190, 2005; Alesina et al. in J Eur Econ Assoc 6:1006–1036, 2008; Ilzetzki in J Dev Econ 96:30–46, 2011). In this chapter, we introduce one work for each of the two strands of research derived from these challenges—that is, Aizenman et al. (NBER Working Paper, No. 5558, 1996, J Int Trade Econ Dev 9:367–395, 2000) and Alesina et al. (J Eur Econ Assoc 6:1006–1036, 2008)—and offer a brief review of other studies. In the end, we conclude that we need to build a new theoretical approach based on our empirical findings in Chap.  1.

Keywords

Theory of procyclical fiscal policy International credit markets Political distortion 

References

  1. Alesina, A., Campante, F., & Tabellini, G. (2008). Why is fiscal policy often procyclical? Journal of the European Economic Association, 6(5), 1006–1036.CrossRefGoogle Scholar
  2. Alesina, A., & Tabellini, G. (2005). Why is fiscal policy often procyclical? NBER Working Paper, No. 11600.Google Scholar
  3. Aizenman, J., Gavin, M., Hausmann, R. (1996). Optimal tax and debt policy with endogenously imperfect creditworthiness. NBER Working Paper, No. 5558.Google Scholar
  4. Aizenman, J., Gavin, M., & Hausmann, R. (2000). Optimal tax and debt policy with endogenously imperfect creditworthiness. The Journal of International Trade & Economic Development, 9(4), 367–395.CrossRefGoogle Scholar
  5. Barro, R. (1973). The control of politicians: an economic model. Public Choice, 14(1), 19–42.CrossRefGoogle Scholar
  6. Barro, R. (1979). On the determination of public debt. Journal of Political Economy, 87(5), 940–971.CrossRefGoogle Scholar
  7. Ferejohn, J. (1986). Incumbent performance and electoral control. Public Choice, 50(1), 5–25.CrossRefGoogle Scholar
  8. Gavin, M., & Perotti, R. (1997). Fiscal policy in Latin America. NBER Macroeconomics Annual, 12, 11–70.CrossRefGoogle Scholar
  9. Ilzetzki, E. (2011). Rent-seeking distortions and fiscal procyclicality. Journal of Development Economics, 96(1), 30–46.CrossRefGoogle Scholar
  10. Lane, P. R. (2003). The cyclical behaviour of fiscal policy: Evidence from the OECD. Journal of Public Economics, 87(12), 2661–2675.CrossRefGoogle Scholar
  11. Persson, T., & Tabellini, G. (2000). Political Economics: Explaining Economic Policy. Cambridge, MA: MIT Press.Google Scholar
  12. Riascos, A., & Végh, C. A. (2003). Procyclical government spending in developing countries: The role of capital market imperfections. Mimeo (UCLA and Banco Republica, Colombia).Google Scholar
  13. Talvi, E., & Végh, C. (2005). Tax base variability and procyclical fiscal policy in developing countries. Journal of Development Economics, 78(1), 156–190.CrossRefGoogle Scholar
  14. Tornell, A., & Lane, P. R. (1999). The voracity effect. American Economic Review, 89(1), 22–46.CrossRefGoogle Scholar

Copyright information

© Development Bank of Japan 2018

Authors and Affiliations

  1. 1.National Graduate Institute for Policy StudiesMinato-kuJapan
  2. 2.Kwansei Gakuin UniversitySandaJapan
  3. 3.Research Institute of Capital FormationDevelopment Bank of JapanChiyoda-kuJapan

Personalised recommendations