Why is Fiscal Policy Often Procyclical?


Alesina, Alberto, and Guido Tabellini. 2006. “Why is Fiscal Policy Often Procyclical?”. Copy at http://www.tinyurl.com/y4elekwx
2007_15_alesina.pdf614 KB


Fiscal policy is procyclical in many countries, and especially in developing ones. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to "starve the Leviathan" to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or fewer taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: procyclicality of fiscal policy is more pronounced in more corrupt democracies.


WCFIA Working Paper No. 07-15, February 2006

Last updated on 03/21/2015