Fiscal Transparency and Procyclical Fiscal Policy

Abstract

This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.