Procyclical Fiscal Policy: Is OPEC an exception?

Abstract

International empirical evidence shows that fiscal policy in developing countries is largely procyclical, opposite to what is held by neo-classical and Keynesian theories and to the cyclical behavior of fiscal policy in G-7 countries. This paper examines the cyclicality of fiscal behavior in 12 developing countries of OPEC during 1990–2009. After testing fiscal measure - government expenditure - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that fiscal variable is strongly procyclical in the full sample. From the results, it can be interpreted that fiscal behavior is more procyclical when the bureaucracy quality, the constraints on the executive and political competition are low.

Keywords: Fiscal Policy, OPEC countries, government expenditure, GMM

JEL: E32, H30, E02, E62