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Rent-seeking distortions and fiscal procyclicality

By Ethan Ilzetzki

Abstract

Recent research has demonstrated that while government expenditures are countercyclical in most industrialized countries, they tend to be procyclical in developing countries. We develop a dynamic political-economy model to explain this phenomenon. In the model, public expenditures provide insurance to uninsured households, and optimal fiscal policy is countercyclical. The introduction of a political friction, in which successive governments disagree on the desired distribution of public spending, can lead to procyclical fiscal policies. Numerical simulations of the model allow us to compare quantitatively the relative role of common explanations for fiscal procyclicality. We conclude that political distortions in the fiscal process can explain fiscal procyclicality better than other common explanations, such as borrowing constraints and macroeconomic volatility

Topics: HB Economic Theory, HJ Public Finance
Publisher: Elsevier B.V.
Year: 2011
DOI identifier: 10.1016/j.jdeveco.2010.07.006
OAI identifier: oai:eprints.lse.ac.uk:33793
Provided by: LSE Research Online
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