Export Diversification and Fiscal Procyclicality

ABSTRACTThis paper provides empirical evidence that more export diversification leads to less fiscal procyclicality, which is robust to different specifications and alternative measures after controlling for terms of trade, resource abundance, and institutional quality. We also find that countries that had previously left the fiscal procyclicality trap fell back again during the Great Recession and export structure was a highly correlated factor. We control for potential endogeneity with instrument variables and exploit within-country variations with panel data to further support our empirical findings. Altering fiscal procyclicality is a novel channel through which export structure affects economic growth.