8 research outputs found
Why is Fiscal Policy Often Procyclical?
Many countries, especially developing ones, follow procyclical fiscal policies, namely
spending goes up (taxes go down) in booms and spending goes down (taxes go up) in
recessions. We provide an explanation for this suboptimal fiscal policy based upon political
distortions and incentives for less-than-benevolent government to appropriate rents. Voters
have incentives similar to the "starving the Leviathan" classic argument, and demand more
public goods or fewer taxes to prevent governments from appropriating rents when the
economy is doing well. We test this argument against more traditional explanations based
purely on borrowing constraints, with a reasonable amount of success