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Many countries, especially developing ones, follow procyclical fiscal polices, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.

Business cycles.

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Business cycles --- Germany

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"External shocks, such as commodity price fluctuations, natural disasters, and the role of the international economy, are often blamed for the poor economic performance of low-income countries. The author quantifies the impact of these different external shocks using a panel vector autoregression (VAR) approach and compares their relative contributions to output volatility in low-income countries vis-a-vis internal factors. He finds that external shocks can only explain a small fraction of the output variance of a typical low-income country. Internal factors are the main source of fluctuations. From a quantitative perspective, the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of these countries. "--World Bank web site.

Business cycles --- Industrial productivity

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Business cycles --- Financial crises

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"Developing countries face a host of macroeconomic challenges in the design and implementation of development strategies and policies. The importance of the underlying poverty and distributional issues creates a need for relevant and reliable ways of tracking the social impact of shocks and policies. This paper describes and demonstrates the use of a stylized framework for simulating the poverty implications of the Dutch disease, a change in the terms of trade and budgetary policy. The basic approach is to embed a Lorenz model of the size distribution of economic welfare in a general equilibrium model of an open economy. It is observed that, while aggregate welfare and poverty effects may be negligible, the structural and distributional impacts tend to be significant. The latter drive the political economy of policymaking and point to the need for an analytical framework that accounts for both the structural richness of the economy and the heterogeneity of the stakeholders "--World Bank web site.

Business cycles --- Poverty --- Developing countries --- Economic policy.