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Turning a Blind Eye to Policy Prescriptions: Exploring the Sources of Procyclical Fiscal Behavior at the Subnational Level

Published in PFM, Vol. 18 No. 3

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 pro-cyclical? 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 ex-penditures, were procyclical. The main sources of procyclicality are the political net-works, changes in the amount of oil, gas and mining grants, federal interventions, and discretionary intergovernmental transfers.

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