Fiscal Transparency and Procyclical Fiscal Policy

TY - UNPB

T1 - Fiscal Transparency and Procyclical Fiscal Policy

AU - Andersen, Asger Lau

AU - Nielsen, Lasse Holbøll Westh

N1 - JEL Classification: D72, E32, E62

PY - 2010

Y1 - 2010

N2 - This paper examines why fiscal policy is procyclical in developing as well as developed countries. We 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: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.

AB - This paper examines why fiscal policy is procyclical in developing as well as developed countries. We 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: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.

KW - Faculty of Social Sciences

KW - politisk økonomi

KW - procyclicality

KW - business cycles

KW - political economy

M3 - Working paper

BT - Fiscal Transparency and Procyclical Fiscal Policy

PB - Department of Economics, University of Copenhagen

ER -