TURNING A BLIND EYE TO POLICY PRESCRIPTIONS: EXPLORING THE SOURCES OF PROCYCLICAL FISCAL BEHAVIOR AT THE SUBNATIONAL LEVEL

Abstract

This paper analyses the fiscal behavior of subnational districts in Argentina over the business cycle. I address two questions. Is the fiscal policy of Argentine districts procyclical? If so, what is the theory that best explains procyclicality? The answers come from the estimation of an error correction model of a panel that spans 23 years and 24 districts. I found that all categories of public expenditures, except for capital expenditures, were procyclical. The main sources of procyclicality are the political networks, changes in the amount of oil, gas and mining grants, federal interventions, and discretionary intergovernmental transfers.