Prague Economic Papers 2022, 31(6):482-508 | DOI: 10.18267/j.pep.814

Counter-cyclical Fiscal Policy in Developed Countries: Does Governance Hinder?

Van Bon Nguyen ORCID...a
a Faculty of Finance - Banking, University of Finance - Marketing (UFM), Ho Chi Minh City, Vietnam

Fiscal policy is an effective instrument in helping governments in developed countries overcome a recession with a high unemployment rate or a hot economy with a high inflation rate to keep the economy on a stable path. Does governance contribute significantly to keeping this goal in these countries? The study looks for an answer by empirically investigating the role of governance in the output gap - fiscal policy relationship for a group of 27 developed countries between 2002 and 2019. It employs the difference GMM Arellano-Bond estimators and the PMG estimator for estimation and robustness check. The results provide some interesting findings. Firstly, both public spending and government revenue are counter-cyclical, confirming the counter-cyclical fiscal policy in developed countries. Secondly, governance hinders the counter-cyclical fiscal policy. The findings imply some crucial policies for governments in developed countries in running the fiscal policy.

Keywords: Counter-cyclical fiscal policy, governance, developed countries
JEL classification: E32, E62, H60

Received: January 18, 2022; Revised: July 9, 2022; Accepted: September 13, 2022; Published: December 29, 2022  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Van Bon, N. (2022). Counter-cyclical Fiscal Policy in Developed Countries: Does Governance Hinder? Prague Economic Papers, 31(6), 482-508. doi: 10.18267/j.pep.814
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Abbott, A., Jones, P. (2013). Procyclical government spending: a public choice analysis. Public Choice, 154(3-4), 243-258, https://doi.org/10.1007/s11127-011-9816-9 Go to original source...
    2. Abdih, Y., Lopez-Murphy, P., Roitman, A., et al. (2010). The Cyclicality of Fiscal Policy in the Middle East and Central Asia: Is the Current Crisis Different? IMF Working Papers No. 2010/068, 1-26. Go to original source...
    3. Agbeyegbe, T. D., Stotsky, J., WoldeMariam, A. (2006). Trade liberalization, exchange rate changes, and tax revenue in Sub-Saharan Africa. Journal of Asian Economics, 17(2), 261-284, https://doi.org/10.1016/j.asieco.2005.09.003 Go to original source...
    4. Alavirad, A. (2003). The Effect of Inflation on Government Revenue and Expenditure: The Case of the Islamic Republic of Iran. OPEC Review, 27(4), 331-341, https://doi.org/10.1111/j.0277-0180.2003.00074.x Go to original source...
    5. Arellano, M., Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies, 58(2), 277-297, https://doi.org/10.2307/2297968 Go to original source...
    6. Arvin, M. B., Pradhan, R. P., Nair, M. S. (2021). Are there links between institutional quality, government expenditure, tax revenue and economic growth? Evidence from low-income and lower middle-income countries. Economic Analysis and Policy, 70, 468-489, https://doi.org/10.1016/j.eap.2021.03.011 Go to original source...
    7. Bashar, O. H. M. N., Bhattacharya, P. S., Wohar, M. E. (2017). The cyclicality of fiscal policy: New evidence from unobserved components approach. Journal of Macroeconomics, 53, 222-234, https://doi.org/10.1016/j.jmacro.2017.07.010 Go to original source...
    8. Budnevich, C. (2003). Countercyclical Fiscal Policy: a Review of the Literature, Empirical Evidence and Some Policy Proposals. From Capital Surges to Drought, 269-291, https://doi.org/10.1057/9781403990099_14 Go to original source...
    9. Buti, M., Van den Noord, P. (2004). Fiscal policy in EMU: Rules, discretion and political incentives. Economic Papers No. 206. ISBN 92-894-5971-9.
    10. Calderón, C., Duncan, R., Schmidt-Hebbel, K. (2016). Do Good Institutions Promote Countercyclical Macroeconomic Policies? Oxford Bulletin of Economics and Statistics, 78(5), 650-670, https://doi.org/10.1111/obes.12132 Go to original source...
    11. Carmignani, F. (2010). Cyclical fiscal policy in Africa. Journal of Policy Modeling, 32(2), 254-267, https://doi.org/10.1016/j.jpolmod.2010.01.002 Go to original source...
    12. Combes, J.-L., Renard, M. F., Tapsoba, S. J.-A. (2019). Provincial public expenditure in China: a tale of pro-cyclicality. Economic Change and Restructuring, 52(1), 19-41, https://doi.org/ 10.1007/s10644-017-9215-4 Go to original source...
    13. Çiçek, D., Elgin, C. (2011). Cyclicality of fiscal policy and the shadow economy. Empirical Economics, 41(3), 725-737, https://doi.org/10.1007/s00181-010-0409-0 Go to original source...
    14. Daliæ, M. (2013). Cyclical properties of fiscal policy in new member states of the EU. Post-Communist Economies, 25(3), 289-308, https://doi.org/10.1080/14631377.2013.813144 Go to original source...
    15. Darby, J., Melitz, J. (2008). Social spending and automatic stabilizers in the OECD. Economic Policy, 23(56), 716-756, https://doi.org/10.1111/j.1468-0327.2008.00210.x Go to original source...
    16. Debrun, X., Kapoor, R. (2010). Fiscal Policy and Macroeconomic Stability: Automatic Stabilizers Work, Always and Everywhere. IMF Working Papers No. 2010/111, 1-46. Go to original source...
    17. Del Granado, J. A., Gupta, S., Hajdenberg, A. (2013). Is Social Spending Procyclical? Evidence for Developing Countries. World Development, 42, 16-27, Go to original source...
    18. De Hoyos, R. E., Sarafidis, V. (2006). Testing for Cross-Sectional Dependence in Panel-Data Models. The Stata Journal, 6(4), 482-496, https://doi.org/10.1177/1536867X060060040 Go to original source...
    19. De Mendonça, H. F., Pinton, O. V. F. (2013). Fiscal Cyclicality in the Brazilian Economy: Something is Changing. Latin American Business Review, 14(2), 163-174, https://doi.org/10.1080/10978526.2013.808951 Go to original source...
    20. Dessus, S., Diaz-Sanchez, J. L., Varoudakis, A. (2016). Fiscal rules and the pro-cyclicality of public investment in the West African Economic and monetary union. Journal of International Development, 28(6), 887-901, https://doi.org/10.1002/jid.3047 Go to original source...
    21. Dolls, M., Fuest, C., Peichl, A. (2012). Automatic stabilizers and economic crisis: US vs. Europe. Journal of Public Economics, 96(3-4), 279-294, https://doi.org/10.1016/j.jpubeco. 2011.11.001 Go to original source...
    22. Du Plessis, S., Smit, B., Sturzenegger, F. (2007). The cyclicality of monetary and fiscal policy in South Africa since 1994. South African Journal of Economics, 75(3), 391-411, https://doi.org/10.1111/j.1813-6982.2007.00128.x Go to original source...
    23. Eslava, M. (2011). The political economy of fiscal deficits: a survey. Journal of Economic Surveys, 25(4), 645-673, https://doi.org/10.1111/j.1467-6419.2010.00647.x Go to original source...
    24. Fraj, S. H., Hamdaoui, M., Maktouf, S. (2018). Governance and economic growth: The role of the exchange rate regime. International Economics, 156, 326-364, https://doi.org/10.1016/j.inteco.2018.05.003 Go to original source...
    25. Frankel, J. (2010). Monetary policy in emerging markets. In: Friedman, B. M., Woodford, M. Handbook of Monetary Economics, pp. 1439-1520. ISBN 9780444532381. Go to original source...
    26. Gavin, M., Perotti, R. (1997). Fiscal Policy in Latin America. NBER Macroeconomics Annual, 12, 11-61, https://doi.org/10.1086/654320 Go to original source...
    27. Grdoviæ Gnip, A. G. (2011). Discretionary measures and automatic stabilizers in the Croatian fiscal policy. Economic research-Ekonomska istra¾ivanja, 24(3), 45-74, https://doi.org/10.1080/1331677X.2011.11517467 Go to original source...
    28. Gootjes, B., de Haan, J. (2022). Procyclicality of fiscal policy in European Union countries. Journal of International Money and Finance, 120, 102276, https://doi.org/10.1016/j.jimonfin.2020.102276 Go to original source...
    29. Gurvich, E., Vakulenko, E., Krivenko, P. (2009). Cyclicality of Fiscal Policy in Oil-Producing Countries. Problems of Economic Transition, 52(1), 24-53, https://doi.org/10.2753/PET1061-1991520102 Go to original source...
    30. Holtz-Eakin, D., Newey, W., Rosen, H. S. (1988). Estimating vector autoregressions with panel data. Econometrica, 56(6), 1371-1395, https://doi.org/10.2307/1913103 Go to original source...
    31. Huang, C.-J., Ho, Y.-H. (2017). Governance and economic growth in Asia. The North American Journal of Economics and Finance, 39, 260-272, https://doi.org/10.1016/j.najef.2016.10.010 Go to original source...
    32. In't Veld, J., Larch, M. Vandeweyer, M. (2013). Automatic Fiscal Stabilisers: What They Are and What They Do. Open Economies Review, 24(1), 147-163, https://doi.org/10.1007/s11079-012-9260-6 Go to original source...
    33. Ishiyama, J. (2015). Political Parties, Democracy, and "Good Governance". The Political Economy of Good Governance, 35-50. Go to original source...
    34. Islam, M. R., McGillivray, M. (2020). Wealth inequality, governance and economic growth. Economic Modelling, 88, 1-13, https://doi.org/10.1016/j.econmod.2019.06.017 Go to original source...
    35. Jalles, J. T. (2021). Dynamics of government spending cyclicality. Economic Modelling, 97, 411-427, https://doi.org/10.1016/j.econmod.2020.04.010 Go to original source...
    36. Jibir, A., Aluthge, C. (2019). Modelling the determinants of government expenditure in Nigeria. Cogent Economics & Finance, 7(1), 1620154, https://doi.org/10.1080/23322039.2019.1620154 Go to original source...
    37. Judson, R. A., Owen, A. L. (1999). Estimating dynamic panel data models: a guide for macroeconomists. Economics Letters, 65(1), 9-15, https://doi.org/10.1016/S0165-1765(99)00130-5 Go to original source...
    38. Kaminsky, G. L., Reinhart, C. M., Végh, C. A. (2004). When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies. NBER Macroeconomics Annual, 19, 11-53, https://doi.org/10.1086/ma.19.3585327 Go to original source...
    39. Kaufmann, D., Kraay, A., Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and Analytical Issues. Hague Journal on the Rule of Law, 3(2), 220-246, https://doi.org/10.1017/S1876404511200046 Go to original source...
    40. Keynes, J. M. (1937). The General Theory of Employment. The Quarterly Journal of Economics, 51(2), 209-223, https://doi.org/10.2307/1882087 Go to original source...
    41. Klemm, A. (2015). Fiscal policy over the cycle: the role of automatic stabilizers. Applied Economics Letters, 22(16), 1298-1302, https://doi.org/10.1080/13504851.2015.1026575 Go to original source...
    42. Larch, M., Orseau, E., van der Wielen, W. (2021). Do EU fiscal rules support or hinder counter-cyclical fiscal policy? Journal of International Money and Finance, 112, 102328, https://doi.org/10.1016/j.jimonfin.2020.102328 Go to original source...
    43. Li, J. S. (2003). Relation-based versus rule-based governance: An explanation of the East Asian miracle and Asian crisis. Review of International Economics, 11(4), 651-673, https://doi.org/10.1111/1467-9396.00409 Go to original source...
    44. Manasse, P. (2006). Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars. IMF Working Paper No. 2006/27. Go to original source...
    45. Mesea, O. E. (2013). The analysis on the cyclical behaviour of fiscal policy in the EU member states. Procedia Economics and Finance, 6, 645-653, https://doi.org/10.1016/S2212-5671(13)00184-6 Go to original source...
    46. Panizza, U. (2001). Electoral rules, political systems, and institutional quality. Economics & Politics, 13(3), 311-342, https://doi.org/10.1111/1468-0343.00095 Go to original source...
    47. Pesaran, M. H., Shin, Y., Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634. Go to original source...
    48. Raut, D. K., Raju, S. (2019). Fiscal rules and cyclicality of fiscal policy: Evidence from Indian states. Reserve Bank of India Occasional Papers, 40(2), 1-32.
    49. Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86-136, https://doi.org/10.1177/1536867X0900900106 Go to original source...
    50. Sackey, J. A. (1981). Inflation and government tax revenue: The case of Trinidad and Tobago with comparative reference to Barbados and Jamaica. Social and Economic Studies, 76-103.
    51. ªen, H., Kaya, A. (2020). Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states. Journal of Policy Modeling, 43(6), 1388-1414, Go to original source...
    52. Srebrnik, N., Strawczynski, M. (2016). Cyclicality of taxes and external debt. Applied Economics, 48(48), 4622-4634, https://doi.org/10.1080/00036846.2016.1161722 Go to original source...
    53. Talvi, E., Vegh, C. A. (2005). Tax base variability and procyclical fiscal policy in developing countries. Journal of Development Economics, 78(1), 156-190, https://doi.org/10.1016/j.jdeveco.2004.07.002 Go to original source...
    54. Thornton, J. (2007). On the cyclicality of South African fiscal policy. South African Journal of Economics, 75(2), 258-264, https://doi.org/10.1111/j.1813-6982.2007.00114.x Go to original source...
    55. UN (2020). The World Economic Situation and Prospects 2020. New York: United Nations. ISBN 978-92-1-004616-9.
    56. Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and statistics, 69(6), 709-748, https://doi.org/10.1111/j.1468-0084.2007.00477.x Go to original source...
    57. WB (2021). Global Economic Prospects, January 2021. Washington, D.C.: World Bank. ISBN 978-1-4648-1613-0.
    58. Yoshino, N., Abidhadjaev, U. (2017). Impact of infrastructure on tax revenue: Case study of high-speed train in Japan. Journal of Infrastructure, Policy and Development, 1(2), 129-148, http://doi.org/10.24294/jipd.v1i2.69 Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content