Fiscal rules and the cyclical behavior of Public investment expenditures in developing countries

Abstract

This article examines the cyclical behavior of public investment within the framework of developing countries over the period 1990-2021 using panel data econometrics. The results vary depending on the adoption of fiscal rules by countries, whether they are flexible or rigid. Indeed, in countries without flexible fiscal rules or subject to rigid rules, the estimation results reveal a significant decrease in public investment during periods of fiscal consolidation. However, this negative impact of fiscal consolidation periods on public investment expenditures diminishes in countries with flexible fiscal rules. This demonstrates that these flexible characteristics contribute to the protection of public investment by mitigating the pro-cyclical bias of investment expenditures during consolidation episodes. Furthermore, results from different alternative specifications of our baseline model remain robust.

Keywords: Pro-cyclicity, Investment expenditures, Panel data, Flexible fiscal rules, fiscal consolidation.

JEL Classification : C23, E6, H5.

Paper type: Empirical Research.