Working Paper

Redistributive Fiscal Policies and Business Cycles in Emerging Economies

Abstract: Government expenditures are pro-cyclical in emerging markets and counter-cyclical in developed economies. We show this pattern is driven by differences in social transfers. Transfers are more counter-cyclical and comprise a larger portion of spending in developed economies compared to emerging. In contrast, government expenditures on goods and services are quite similar across the two. In a small open economy model, we find disparate social transfer policies can account for more than a half of the excess volatility of consumption relative to output in emerging economies. We analyze how differences in tax policy and the nature of underlying inequality amplify or mitigate this result.

Keywords: Emerging Markets; Open Economy Macroeconomics; Fiscal Policy; Business Cycles;

JEL Classification: E3; E6; F4;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2017-05-24

Number: 1709

Pages: 55 pages