Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?

A large empirical literature claims that …fiscal policy in developingcountries is procyclical, in contrast to high-income countries where it is countercyclical. Some authors, however, have questioned this …finding because theliterature has typically ignored endogeneity problems. To settle this issue, webuild a novel quarterly dataset for 49 countries covering the period 1960-2006and subject the data to a battery of econometric tests: instrumental variables,simultaneous equations, and time-series methods. We …find that (i) …fiscal policyis indeed procyclical in developing countries and (ii) …fiscal policy is also expansionary, lending empirical support to the notion that when "it rains, it pours."[...]