Fiscal Transparency and Procyclical Fiscal Policy*

This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a procyclical bias arises as a consequence of a political agency problem between voters and politicians. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find strong empirical support for the first prediction in OECD countries. We also find encouraging results in favour of the second prediction in OECD countries as well as in a broader sample of countries: better access to information about government policies reduces the procyclical bias in government spending in good times