Is fiscal countercyclicality growth enhancing? Evidence from developing countries over the period 1990–2019

The objective of this paper is to analyze the time-varying effect of improving fiscal countercyclicality on growth for a sample of 35 developing countries over the period 1990–2019. By
estimating a time-varying coefficient for fiscal countercyclicality, incorporated as a variable in a
panel model, we first examine how the public debt ratio and electoral motivations influence the
ability to adopt countercyclical policies. Secondly, we show that greater countercyclicality
positively affects economic growth and contributes to reducing the output gap, particularly
during recessions, by channeling production towards its potential path. Finally, our findings are
confirmed across two sub-samples, demonstrating a positive effect on growth before the 2008
crisis and a reduction in the output gap both before and after the crisis. The effect is stronger in
the sub-sample characterized by high income, low debt, and strong control of corruption, suggesting that the effectiveness of countercyclical policies depends on macroeconomic and institutional factors.
Countercyclical fiscal management should therefore be given greater consideration by fiscal
policymakers in developing countries, both upstream and downstream.