Working Paper: NBER ID: w17619
Authors: Jeffrey A. Frankel; Carlos A. Végh; Guillermo Vuletin
Abstract: In the past, industrial countries have tended to pursue countercyclical or, at worst, acyclical fiscal policy. In sharp contrast, emerging and developing countries have followed procyclical fiscal policy, thus exacerbating the underlying business cycle. We show that, over the last decade, about a third of the developing world has been able to escape the procyclicality trap and actually become countercyclical. We then focus on the role played by the quality of institutions, which appears to be a key determinant of a country's ability to graduate. We show that, even after controlling for the endogeneity of institutions and other determinants of ...scal procyclicality, there is a causal link running from stronger institutions to less procyclical or more countercyclical fiscal policy.
Keywords: Fiscal Policy; Procyclicality; Countercyclicality; Institutional Quality
JEL Codes: E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional Quality (L15) | Fiscal Policy Procyclicality (E62) |
| Institutional Quality (L15) | Countercyclical Fiscal Policy (E62) |
| Fiscal Policy Procyclicality (E62) | Institutional Quality (L15) |
| Institutional Quality (L15) | Other Determinants of Fiscal Policy (H39) |