Fiscal Transparency And Procyclical Fiscal Policy

Download Now Free registration required

Executive Summary

This paper examines why fiscal policy is procyclical in developing as well as developed countries. The authors introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: the procyclical bias in fiscal policy arises only in good times; and a higher degree of fiscal transparency reduces the bias in good times. They find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.

  • Format: PDF
  • Size: 627.9 KB