Fiscal policy is taking centre stage. Among advanced countries,
the news is bad; Europe’s periphery teeters, the UK slashes, the
US deadlocks, Japan muddles. But in the rest of the world there
is good news. In an historic reversal, many emerging market and
developing countries have over the last decade achieved a
countercyclical fiscal policy. In the past, developing countries
tended to follow procyclical fiscal policy. They increased
spending (or cut taxes) during periods of expansion and cut
spending (or raised taxes) during periods of recession. Many
authors have documented that fiscal policy has tended to be
procyclical in developing countries, in comparison with a
pattern among industrialised countries that has been by and
large countercyclical (Gavin and Perotti 1997, Tornell and Lane
1999, Kaminsky et al. 2004, Talvi and Végh 2005, Mendoza and
Oviedo 2006, Alesina et al. 2008, and Ilzetski and Végh 2008).
Most studies look at the procyclicality of government spending,
because tax receipts are particula