Working Paper Abstract
297.Why Is Fiscal Policy Often Procyclical?by Alberto Alesina (Harvard) and Guido Tabellini (IGIER, Bocconi)
Many countries, especially developing ones, follow procyclical fiscalpolices, namely spending goes up (taxes go down) in booms and spendinggoes down (taxes go up) in recessions. We provide an explanationfor this suboptimal fiscal policy based upon political distortions andincentives for less-than-benevolent government to appropriate rents.Voters have incentives similar to the “starving the Leviathan” classicargument, and demand more public goods or fewer taxes to preventgovernments from appropriating rents when the economy is doing well.We test this argument against more traditional explanations basedpurely on borrowing constraints, with a reasonable amount of success.
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IGIER - Università Bocconi