Back Matter

APPENDIX I

Definitions and Sources of Variables

Fiscal data are obtained from the IMF’s Government Financial Statistics, while GDP, GDP deflators, and exchange rates are obtained from the IMF’s International Financial Statistics. In a few cases where there is a gap in the series, we extrapolate by taking the average of the data at periods t-1 and t+1, to ensure continuous data. All fiscal variables are converted into constant prices using the CPI index, taken from the World Economic Outlook (WEO) database. We examine the following public spending variables: total spending, current spending, government consumption (spending on goods and services) and its breakdown into its wage and nonwage components, government investment, non-interest current government spending, and non-interest total government spending.

Regarding the explanatory variables used in the second stage, following Lane (2003) we include average output volatility, measured as the standard deviation of the GDP growth rate. In addition, we consider several control variables, including (i) average index (0,1) of power dispersion for each country, taken from Henisz (2000); (ii) average output per capita taken from WEO data; (iii) the government size, measured as average government spending (government consumption plus government investment) as percent of GDP; (iv) the standard deviation of the terms of trade, taken from WEO data; (v) average share of ODA as a share of GNI, taken from WEO data; and (vi) a financial risk rating, reported by ICRG. This rating provides a means of assessing a country’s ability to service its current and future obligations with respect to official, commercial, and trade debt. Ratings are compiled by assigning risk points to a pre-set group of factors. The higher the risk point total, the higher the risk.

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1

We would like to thank Rina Bhattacharya and Chris Wu for help and advice in preparing this paper. We received helpful comments from Hamid Davoodi, Eduardo Ley, Clinton Shiells, Irineu de Carvalho Filho, and Evan Tanner on previous drafts of this paper. The usual disclaimer applies.

2

Cyclical ratcheting refers to the tendency of the ratio of government spending to GDP to rise during recessions and to be only partially reduced during expansions.

3

Note that this does not necessarily refer to transfers to individuals or other levels of government, but can also include spending on infrastructure, wages, and other current spending which can benefit particular groups.

4

See Chang (2002) for a brief summary of recent studies and Peacock and Scott (2000) for a critical review.

5

Note that this test involves nonstandard critical values (see Ericsson and McKinnon, 2002). Given data constraints, we have assumed that output is weakly exogenous.

6

For OECD countries, Lane (2003) also finds little support for the voracity hypothesis. Power dispersion was even found to be negatively associated with procyclicality in total government expenditure and capital expenditure.

7

The financial risk components include foreign debt as a percentage of GDP; foreign debt service as a percentage of exports of goods and services; current account as a percentage of exports of goods and services; net international liquidity in months of imports; and exchange rate stability.

8

For a number of countries, fiscal data are available only for a much shorter time span.

9

Note that in cases where government spending is stationary, the interpretation of a long-term relationship between spending and output does not hold.

The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries
Author: Ms. Gabriela Inchauste, Mr. Bernardin Akitoby, Mr. Benedict J. Clements, and Mr. Sanjeev Gupta