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Cyclical Fiscal Policy, Output Volatility, and Economic Growth

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  • Harald Badinger

Abstract

This paper provides a comprehensive empirical assessment of the relation between the cyclicality of fiscal policy, output volatility, and economic growth, using a large cross-section of 88 countries over the period 1960 to 2004. Identification of the effects of (endogenous) cyclical fiscal policy is achieved by exploiting the exogeneity of countries’ political and institutional characteristics, which we find to be relevant determinants of fiscal cyclicality. There are three main results: First, both pro- and countercyclical fiscal policy amplify output volatility, much in a way like pure fiscal shocks that are unrelated to the cycle. Second, output volatility, due to variations in cyclical and discretionary fiscal policy, is negatively associated with economic growth. Third, there is no direct effect of cyclicality of economic growth other than through output volatility. These findings advocate the introduction of fiscal rules that limit the use of (discretionary and) cyclical fiscal policy to improve growth performance by reducing volatility.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-04/cesifo1_wp2268.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2268.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2268

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Keywords: cyclical fiscal policy; output volatility; economic growth; institutions;

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References

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  2. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
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  15. Howitt, Peter & Aghion, Philippe, 2006. "Appropriate Growth Policy: A Unifying Framework," Scholarly Articles 4554121, Harvard University Department of Economics.
  16. H. Badinger, 2009. "Fiscal rules, discretionary fiscal policy and macroeconomic stability: an empirical assessment for OECD countries," Applied Economics, Taylor & Francis Journals, vol. 41(7), pages 829-847.
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Cited by:
  1. Ferré, Montserrat, 2012. "The effects of uncertainty about countries’ compliance with the Stability and Growth Pact," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 660-674.
  2. Anastasios, Pappas, 2010. "Capital mobility and macroeconomic volatility: evidence from Greece," MPRA Paper 29106, University Library of Munich, Germany.

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