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Title:Procyclicality or reverse causality? PDF Logo
Authors:Jaimovich, Dany
Panizza, Ugo
Issue Date:2007
Series/Report no.:Working paper // Inter-American Development Bank, Research Department 599
Abstract:There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear.
Subjects:Fiscal Policy
Business Cycle
Emerging Markets
JEL:E62
E32
H62
Document Type:Working Paper
Appears in Collections:Research Department Working Papers, Inter-American Development Bank

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