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ABSTRACT
This 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.
Acknowledgments
We thank Xu Yishan for excellent research assistance. We thank the editor and three anonymous reviewers for their constructive comments. All remaining errors are our own.
Ting Ji acknowledges the support by National Natural Science Foundation of China under Grants No. 71703180 & 71603297; Dongzhou Mei acknowledges the support by National Natural Science Foundation of China under Grant No. 71773149.
Notes
1. Ting Ji: Corresponding author.
2. Source: Vegh (Citation2015).
3. We implement similar analysis using this β from Alesina, Campante, and Tabellini (Citation2008), and the patterns are similar with those using Woo’s β.
5. In fact, considering that this index is larger when export concentrates, the most suitable name seems to be “export concentration”.
6. Most importantly, export diversification data starts in 1995.
7. Details are omitted to conserve space but we are glad to provide them when needed.
8. To be strict, period 3 is almost “bi-modal” because the left peak is not fully developed, but this does not hurt our reasoning.