Procyclicality of Fiscal Policy in Emerging Countries : The Cycle is the Trend

This paper uses the Aguiar and Gopinath (2007) methodology in order to estimate whether 'the cycle is the trend' in 23 emerging markets and 22 OECD economies. These estimates are then used to test whether procyclical fiscal policy in emerging countries is due to persistent shocks to per-capita GDP. We find support for this hypothesis. While both developed and emerging countries have a procyclical for investment expenditure, procyclicality is evident in emerging countries also for government consumption and transfers. Over the period of increasing globalization after the nineties, there are signs of a reduction in the extent of procyclical expenditure policy in emerging countries. We also find, that in countries with high levels of foreign direct investment, procyclicality is milder