Role of institutional cost associated with providing public goods in cyclicality of fiscal policy and macroeconomic volatility
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Procyclical fiscal policy in developing countries has been discussed as a result of imperfect institutional qualities or inefficient fiscal policy procedures in those economies. In this paper, I test the argument by implementing an institutional cost associated with providing public goods in a simple new Keynesian Dynamic Stochastic General Equilibrium (DSGE) model and observing its effect on a cyclicality of macroeconomic stabilization policies and macroeconomic fluctuations. The simulation result shows that when the cost exists, the government spending gap is procyclical and key macroeconomic variables tend to be relatively more volatile, while the public spending gap is countercyclical with the absence of the institutional cost.
Abstract
Procyclical fiscal policy in developing countries has been discussed as a result of imperfect institutional qualities or inefficient fiscal policy procedures in those economies. In this paper, I test the argument by implementing an institutional cost associated with providing public goods in a simple new Keynesian Dynamic Stochastic General Equilibrium (DSGE) model and observing its effect on a cyclicality of macroeconomic stabilization policies and macroeconomic fluctuations. The simulation result shows that when the cost exists, the government spending gap is procyclical and key macroeconomic variables tend to be relatively more volatile, while the public spending gap is countercyclical with the absence of the institutional cost.
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