Tax Base Variability and Procyclical Fiscal Policy / Ernesto Talvi, Carlos A. Vegh.

Format:

Book

Author/Creator:

Talvi, Ernesto.

Contributor:

National Bureau of Economic Research.

Vegh, Carlos A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7499.

NBER working paper series no. w7499

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

Based on a sample of 56 countries, we find that while fiscal policy in the G-7 countries appears to be broadly consistent with Barro's tax smoothing proposition, in developing countries government spending and taxes are highly procyclical (i.e., government spending rises and taxes fall during expansions, while the reverse is true in recessions). To explain this puzzle, we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending. Given this distortion, a government that faces large (and perfectly anticipated) fluctuations in the tax base will find it optimal to run a procyclical fiscal policy. We argue that the differences in fiscal policy between the G-7 countries and developing countries can be traced back to the fact that the tax base is much more volatile in developing countries than in the G-7 countries.

Notes:

Print version record

January 2000.