Procyclical Fiscal Policy and Asset Market Incompleteness

Thu, 01 Jan 2026 00:00:00 +0000

Developing and emerging economies exhibit procyclical fiscal policy on both the spending and taxation sides: government expenditures expand in booms and contract in recessions, and tax rates fall in good times while rising in bad times. This is the mirror image of optimal countercyclical policy prescribed by standard theory and practiced in advanced economies. Understanding why developing countries pursue policies that amplify already-volatile business cycles is a long-standing puzzle in international macroeconomics.

Andrés Fernández | Macro Paper Warehouse

Procyclical Fiscal Policy and Asset Market Incompleteness