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Rent-seeking distortions and fiscal procyclicality

Ilzetzki, Ethan (2011) Rent-seeking distortions and fiscal procyclicality. Journal of Development Economics, 96 (1). pp. 30-46. ISSN 0304-3878

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Identification Number: 10.1016/j.jdeveco.2010.07.006

Abstract

Recent research has demonstrated that while government expenditures are countercyclical in most industrialized countries, they tend to be procyclical in developing countries. We develop a dynamic political-economy model to explain this phenomenon. In the model, public expenditures provide insurance to uninsured households, and optimal fiscal policy is countercyclical. The introduction of a political friction, in which successive governments disagree on the desired distribution of public spending, can lead to procyclical fiscal policies. Numerical simulations of 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 and macroeconomic volatility.

Item Type: Article
Official URL: http://www.elsevier.com/wps/find/journaldescriptio...
Additional Information: © 2010 Elsevier B.V.
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
JEL classification: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 01 Apr 2011 09:25
Last Modified: 30 May 2014 12:05
URI: http://eprints.lse.ac.uk/id/eprint/33793

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