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Working Paper Abstract

297.
Why Is Fiscal Policy Often Procyclical?

by Alberto Alesina (Harvard) and Guido Tabellini (IGIER, Bocconi)

Abstract

Many countries, especially developing ones, follow procyclical fiscal
polices, namely spending goes up (taxes go down) in booms and spending
goes down (taxes go up) in recessions. We provide an explanation
for this suboptimal fiscal policy based upon political distortions and
incentives for less-than-benevolent government to appropriate rents.
Voters have incentives similar to the “starving the Leviathan” classic
argument, and demand more public goods or fewer taxes to prevent
governments from appropriating rents when the economy is doing well.
We test this argument against more traditional explanations based
purely on borrowing constraints, with a reasonable amount of success.

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Last updated February 27, 2007