Conventional wisdom dictates that a fiscal policy should be counter-cyclical. However contrary
to this conventional views recent research has demonstrated that fiscal policy is actually
procyclical in most developing countries. In this book we attempt to propose a new
interpretation of this procyclicality after reviewing theoretical and empirical evolution of
the research. In particular by incorporating the political effort behavior of private agents
into a weak government model we explore how income fluctuations affect the optimal budget
deficits in a political economy. If the government can control the political behavior normally
the optimal budget deficit should rise in a recession as a first-best case however
interestingly a recession does not necessarily prompt an increase in the budget deficits in a
second-best political economy. The response of the budget deficits to income fluctuations
mainly depends on the efficiency of political effort which may correspond to the degree of
democracy and bureaucratic efficiency of the governments. We test the prediction of the
pro-cyclical fiscal policy and find it applicable for democratic countries with semi-efficient
governments including Japan.
