DP8622 Government Spending Cyclicality: Evidence from Rainfall Shocks as an Instrument for Cyclical Income

Author(s): Markus Brückner, Mark Gradstein
Publication Date: October 2011
Keyword(s): cyclicality, Fiscal policy
JEL(s): E62
Programme Areas: International Macroeconomics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8622

This research revisits the cyclicality of fiscal policies. To identify and estimate more precisely the magnitude of a causal effect of cyclical income on government spending, we employ annual rainfall data as an instrument for national income in the context of sub-Saharan countries. Our results confirm procyclical behavior of government spending and of tax revenues; debt and deficit are found to be countercyclical. Specifically, government spending is procyclical during upturns and acyclical during downturns. We also find that its procyclicality is correlated with corruption, especially among democracies.