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Can automatic government spending be procyclical?

August 6, 2020

DECRG Kuala Lumpur Seminar Series

  • It is well-known by now that government spending has typically been countercyclical in industrial countries and procyclical in developing economies. Most of this literature has focused on analyzing aggregate government spending or discretionary spending categories such as government consumption and government investment. Little is known about the cyclical behavior of automatic government spending which emerges from laws, or even constitutions, benefiting people who meet certain eligibility criteria and comprises unemployment insurance, family programs and benefits, and social security transfers. In principle, the main categories of automatic government spending are expected to be either countercyclical (especially unemployment insurance and other shock absorber programs) or acyclical (especially social security and other structural programs). We find that while automatic government spending is, as expected, countercyclical in industrial countries, it is, surprisingly, procyclical in the developing world. We track the source of this puzzling procyclical behavior to (i) the effective lack of automatic stabilizers like unemployment insurance and (ii) more intriguingly, to the existence of perverse automatic destabilizing mechanisms in social security spending (especially when lacking indexation mechanisms). We also show that the presence and nature of these two social programs are crucial new determinants of government spending cyclicality as well as macroeconomic volatility, even after controlling for other well-known determinants and addressing potential endogeneity concerns.

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  • Guillermo Vuletin is a Senior Economist at the Office of the Chief Economist for Latin America and the Caribbean of the World Bank. He received a PhD in Economics from the University of Maryland in 2007 and an undergraduate degree and a MA in Economics from the Universidad Nacional de La Plata, Argentina. Prior to joining the World Bank, he was a Lead Economist in the Research Department at the Inter-American Development Bank. His research focuses on fiscal and monetary policies with a particular interest in macroeconomic policy in emerging and developing countries.  His work has been published in Journal of Monetary Economics, American Economic Journal: Economic Policy, and Journal of Development Economics, as well as in other journals.  His research has been featured in prominent media outlets, such as The Economist, The Wall Street Journal, The Financial Times, and The Washington Post, and other international and regional newspapers.

DETAILS

  • WHEN (MALAYSIA): Thursday, August 6, 2020 (9:00 - 10:00AM Kuala Lumpur time)
  • WHEN (US): Wednesday, August 5, 2020 (9:00 – 10:00PM ET/Washington, D.C. time)
  • WATCH: Watch LIVE
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