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This paper studies the cyclical aspects of fiscal policy in Sub-Saharan Africa countries during 1970-2014. It compares the cyclical properties of real government consumption in the region with those in other developing regions and high-income countries, and examines whether there has been a change in the cyclical nature of fiscal policy in recent years. The analysis finds that government consumption is procyclical in Sub-Saharan African countries, more so than in other regions, and that accounting for endogeneity increases the degree of cyclicality. The cyclical properties of government spending vary along the business cycle, with the level of cyclicality being larger when the level of real economic activity is above the trend relative to when it is below the trend. Mirroring the pattern in other developing regions, the degree of cyclicality has changed since 2002 in Sub-Saharan Africa, with incipient signs of a shift toward acyclical or more countercyclical policies. The evidence does not suggest that resource wealth or fragility increases the procyclicality of government consumption in Sub-Saharan Africa. Official development assistance is found to exacerbate the procyclical stance of fiscal policy in the region, but the result depends on the relative size of foreign aid received.

Cyclicality --- Developing Countries --- Fiscal Policy

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This paper looks at the correlation between the cyclical components of gross domestic product and the exchange rate and classifies countries' currencies as procyclical if they appreciate in good times, countercyclical if they appreciate in bad times, and acyclical otherwise. With this classification, the paper shows that: (i) the countries that are commodity exporters and experience procyclical capital flows tend to have procyclical currencies; (ii) countries with procyclical currencies tend to restrict their capital accounts, perhaps as an attempt to reduce the degree of procyclicality; (iii) countries with procyclical currencies pursue procyclical monetary policy; (iv) however, in the last decade, there is a disconnect between the cyclicality of currency and monetary policy; and (v) the disconnect may reflect a decline in the fear of floating, which can be partially attributed to an improvement in countries' net foreign asset positions.

Countercyclical Currencies --- Currency Cyclicality --- Exchange Rate --- Fear Of Floating --- Foreign Asset Position --- Monetary Policy --- Procyclical Currencies --- Trilemma

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West African Economic and Monetary Union arrangements have been instrumental in helping member countries maintain low inflation. However, a lesser-known characteristic of the West African Economic and Monetary Union, with possible implications for economic growth, is the high exposure to shocks and the pro-cyclicality of fiscal policy associated with these arrangements. Evidence from a panel of 80 low-income and lower middle-income countries over the period 1995-2012 suggests that, in the Union, both public investment and current public expenditure are more pro-cyclical than they are in other countries. In particular, public investment contracts more in "bad times" than it increases in "good times" in order to absorb negative shocks to the budget in the context of strict fiscal convergence criteria. The asymmetric response of public investment to shocks could thus be a reason for the relatively low levels of infrastructure in the Union. Comparisons with earlier periods suggest that public investment has become pro-cyclical since the introduction of the fiscal convergence criteria in 1994. Moreover, the shocks that affect Union member countries appear to be highly idiosyncratic and thus difficult to mitigate by the Union's common monetary policy. The pro-cyclicality of public expenditure and the high asymmetry of shocks that affect Union member countries justify exploring options for greater counter-cyclicality of rules-based fiscal frameworks and for risk-sharing.

Access to Finance --- Asymmetric shocks --- Debt Markets --- Economic Stabilization --- Fiscal Adjustment --- Fiscal rules --- Macroeconomics and Economic Growth --- Poverty Reduction --- Pro-cyclicality --- Public investment --- Public Sector Expenditure Policy --- Risk sharing

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Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price windfalls and maintain spending during price busts. This paper questions this characterization and policy advice. Using a New Keynesian model, it finds that optimal fiscal policy is heterogeneous depending on the commodity exported and exchange rate regime. Optimal fiscal policy is often procyclical in countries with floating exchange rates because many commodity price shocks are highly persistent, and so they should be spent according to the permanent income hypothesis. In contrast, in countries with fixed exchange rates, optimal fiscal policy becomes countercyclical to smooth the business cycle. Empirically, the paper introduces a new measure of fiscal cyclicality, the marginal propensity to spend (MPS) an extra dollar of commodity revenues, and shows that it is moderately procyclical overall but highly heterogeneous across countries depending on their characteristics. Consistent with theory, the MPS is more procyclical in countries with floating exchange rates than those with fixed exchange rates. Moreover, in countries with floating exchange rates, the MPS is higher in countries facing more persistent commodity price shocks.

Agriculture --- Business Cycles and Stabilization Policies --- Commodities --- Commodity Exporters --- Commodity Prices --- Cyclicality --- Fiscal and Monetary Policy --- Fiscal Policy --- Macroeconomics and Economic Growth --- Price Shock --- Price Volatility --- Public Sector Development

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This paper examines how fiscal rules, exchange rate regimes, and institutional quality affect the cyclical behavior of fiscal policy (how government spending responds to fluctuations in gross domestic product). The analysis is performed on a panel of 153 advanced, emerging, and developing countries over 1993-2015 using local Gaussian-weighted ordinary least squares and two-stage least squares estimators. The findings show that the adoption of fiscal rules alone is not sufficient to promote countercyclical fiscal policy and should be combined with strong institutions. Moreover, fiscal rules seem to limit procyclicality, especially in countries with flexible exchange rate regimes rather than in countries with fixed exchange rates. The analysis also finds that the disciplining effect of fiscal rules depends on the type of rule.

Business Cycle --- Business Cycles and Stabilization Policies --- Cyclicality --- Economic Policy, Institutions and Governance --- Exchange Rate Regime --- Fiscal and Monetary Policy --- Fiscal Discipline --- Fiscal Policy --- Governance --- Governance and the Financial Sector --- Institutions --- Macroeconomics and Economic Growth --- National Governance --- Procyclical Policy --- Public Sector Development