Working Paper: CEPR ID: DP8622
Authors: Markus Brckner; Mark Gradstein
Abstract: This research revisits the cyclicality of fiscal policies. To identify and estimate more precisely the magnitude of a causal effect of cyclical income on government spending, we employ annual rainfall data as an instrument for national income in the context of sub-Saharan countries. Our results confirm procyclical behavior of government spending and of tax revenues; debt and deficit are found to be countercyclical. Specifically, government spending is procyclical during upturns and acyclical during downturns. We also find that its procyclicality is correlated with corruption, especially among democracies.
Keywords: cyclicality; fiscal policy
JEL Codes: E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rainfall (Q54) | GDP growth (O49) |
| GDP growth (O49) | Government spending (H59) |
| Rainfall (Q54) | Government spending (H59) |
| Negative GDP growth (E20) | Government spending (H59) |
| Tax revenues (H29) | Debt and deficit (H62) |
| Corruption (D73) | Government spending in democracies (D72) |