Working Papers
Rent-Seeking Distortions and Fiscal Procyclicality
Job Market Paper
Abstract: Several empirical studies have found that government expenditures are procyclical in developing countries, unlike the countercyclical expenditures observed in high-income countries. We develop a dynamic political economy model to explain this phenomenon. In the model, governments provide public insurance to uninsured households, and Pareto-efficient and time-consistent redistributive policies are countercyclical. The introduction of a political friction, in which alternating governments disagree on the desired redistributive policy, can lead to procyclical transfer policies. In numerical simulations, the model successfully captures the cyclicality of government expenditures, tax revenues, and deficits observed in the data for both high-income and developing countries. Simulations also allow a quantitative comparison with other common explanations for fiscal procyclicality. We find that without the political friction, borrowing constraints and differences in macroeconomic volatility cannot account for the differences in fiscal policy across countries in this setting.
Procyclical Fiscal Policy in Developing Countries: Truth or Fiction
(With Carlos A. Vegh) NBER Working Paper No. 14191
This Draft: July 2008.
Abstract: A large empirical literature finds that fiscal policy in developing countries is procyclical, in contrast to the countercyclical fiscal policy found in high-income countries. The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical fiscal policy could be more fiction that truth since, by and large the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy. to settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a batter of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea the procyclical fiscal policy in developing countries is in fact truth and not fiction. We also find evidence that fiscal policy is expansionary-a channel disregarded by the existing literature-lending empirical support to the notion that "when it rains, it pours."
Exchange Rate Arrangements Entering the 21st Century: Which Anchor Will Hold?
(with Carmen M. Reinhart and Kenneth S. Rogoff)
COMING SOON
How Big (or Small?) are Fiscal Multipliers?
(with Enrique Mendoza and Carlos A. Vegh)
COMING SOON