Government spending cyclicality: evidence from transitory and persistent shocks in developing countries

Brückner, Markus and Gradstein, Mark (2014) Government spending cyclicality: evidence from transitory and persistent shocks in developing countries. Journal of Development Economics, 111 107-116. doi:10.1016/j.jdeveco.2014.08.003


Author Brückner, Markus
Gradstein, Mark
Title Government spending cyclicality: evidence from transitory and persistent shocks in developing countries
Journal name Journal of Development Economics   Check publisher's open access policy
ISSN 0304-3878
1872-6089
Publication date 2014-11
Year available 2014
Sub-type Article (original research)
DOI 10.1016/j.jdeveco.2014.08.003
Open Access Status
Volume 111
Start page 107
End page 116
Total pages 10
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Language eng
Abstract We revisit the debate of whether government spending is procyclical in developing countries. Our main contribution is to argue that, beyond exogeneity of the income shock, an empirical analysis of government spending cyclicality must be carefully tailored to the shock's persistence. We first illustrate this point in a simple intertemporal model. We then use instrumental variables estimation to characterize the response of government expenditures to exogenous shocks with different degrees of persistence. Our estimation strategy exploits that: (i) year-to-year variations in rainfall have a significant positive contemporaneous effect on sub-Saharan African countries' real GDP but this effect is transitory; (ii) year-to-year variations in the GDP of sub-Saharan African countries' OECD trading partners have a significant positive contemporaneous effect on sub-Saharan African countries' real GDP and this effect is persistent. Using rainfall as an instrument for sub-Saharan African countries' GDP yields a government consumption expenditures elasticity response of around 0.4 (standard error 0.3). When the instrument is the GDP of sub-Saharan African countries' OECD trading partners the estimated government consumption expenditures elasticity response is around 1.1 (standard error 0.2). The elasticity response of government consumption expenditures to persistent income shocks is thus significantly higher relative to transitory shocks.
Keyword Government spending cyclicality
Permanent and transitory output shocks
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Non HERDC
School of Economics Publications
 
Versions
Version Filter Type
Citation counts: TR Web of Science Citation Count  Cited 2 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 2 times in Scopus Article | Citations
Google Scholar Search Google Scholar
Created: Thu, 05 Feb 2015, 15:21:41 EST by Alys Hohnen on behalf of School of Economics