Rent-Seeking Distortions and Fiscal Procyclicality

Recent research has demonstrated that while government expenditures are countercyclical inmost industrialized countries, they tend to be procyclical in developing countries. We develop adynamic political economy model to explain this phenomenon. In the model, public expendituresprovide insurance to uninsured households, and optimal …fiscal policy is countercyclical. Theintroduction of a political friction, in which successive governments disagree on the desireddistribution of public spending, can lead to procyclical …fiscal policies. Numerical simulationsof the model allow us to compare quantitatively the relative role of common explanations for…fiscal procyclicality. We conclude that political distortions in the …fiscal process can explain…fiscal procyclicality better than other common explanations, such as borrowing constraints andmacroeconomic volatility.[...]