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Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-cyclical?

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  • Balázs Égert

Abstract

This paper analyses the reaction of fiscal policy to the cycle in OECD countries. The results suggest that while overall government balances were counter-cyclical in the past and more so in economic downturns than in upswings, discretionary fiscal policy was neutral on average. However, discretionary fiscal policy appears to react to the cycle in a non-linear fashion: fiscal policy in countries with high public debt and high government deficits tends to be pro-cyclical, while countries that have low public debt and that have surpluses are more likely to conduct a counter-cyclical fiscal policy. The paper also finds that asset prices have a significant impact on government balances.

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File URL: http://economix.fr/pdf/dt/2012/WP_EcoX_2012-12.pdf
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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-12.

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Length: 43 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-12

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Keywords: Fiscal policy; pro-cyclicality; counter-cyclicality; OECD countries;

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References

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  1. Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy often Procyclical?," CESifo Working Paper Series 1556, CESifo Group Munich.
  2. Bun, Maurice J. G. & Kiviet, Jan F., 2003. "On the diminishing returns of higher-order terms in asymptotic expansions of bias," Economics Letters, Elsevier, vol. 79(2), pages 145-152, May.
  3. Beetsma, Roel & Giuliodori, Massimo, 2008. "Fiscal Adjustment to Cyclical Developments in the OECD: An Empirical Analysis Based on Real-Time Data," CEPR Discussion Papers 6692, C.E.P.R. Discussion Papers.
  4. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  5. Bernoth, Kerstin & Hughes Hallett, Andrew & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
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  7. Zsolt Darvas, 2010. "The Impact of the Crisis on Budget Policy in Central and Eastern Europe," OECD Journal on Budgeting, OECD Publishing, vol. 10(1), pages 1-42.
  8. Sanvi Avouyi-Dovi & Julien Matheron, 2005. "Interactions between business cycles, financial cycles and monetary policy: stylised facts," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 273-98 Bank for International Settlements.
  9. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  10. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
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  12. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
  13. Strawczynski, Michel & Zeira, Joseph, 2009. "Cyclicality of Fiscal Policy: Permanent and Transitory Shocks," CEPR Discussion Papers 7271, C.E.P.R. Discussion Papers.
  14. Everts, Martin, 2006. "Duration of Business Cycles," MPRA Paper 1219, University Library of Munich, Germany.
  15. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2004. "Institutions and Cyclical Properties of Macroeconomic Policies," Working Papers Central Bank of Chile 285, Central Bank of Chile.
  16. Sven Jari Stehn & Daniel Leigh, 2009. "Fiscal and Monetary Policy During Downturns: Evidence from the G7," IMF Working Papers 09/50, International Monetary Fund.
  17. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
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  19. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  20. Marco Buti & Paul Noord, 2004. "Fiscal Discretion and Elections in the Early Years of EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 737-756, November.
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Citations

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Cited by:
  1. Vito Tanzi, 2011. "The Return to Fiscal Rectitude After the Recent Escapade," Rivista di Politica Economica, SIPI Spa, issue 3, pages 253-277, JULY-SEPT.
  2. Cerón, Juan A., 2012. "La respuesta de la política fiscal a la actividad económica en los países desarrollados/Fiscal policy reaction to economic activity in developed countries," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 369 (32 pag, Abril.
  3. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  4. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
  5. Åsa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Guillaume Bousquet & Francesca Spinelli, 2012. "Looking to 2060: Long-Term Global Growth Prospects: A Going for Growth Report," OECD Economic Policy Papers 3, OECD Publishing.
  6. Balázs Égert, 2011. "Bringing French Public Debt Down: The Options for Fiscal Consolidation," OECD Economics Department Working Papers 858, OECD Publishing.
  7. Truong Nguyen, 2013. "Estimating India’s Fiscal Reaction Function," ASARC Working Papers 2013-05, The Australian National University, Australia South Asia Research Centre.
  8. Christopher Reicher, 2013. "A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments?," Kiel Working Papers 1850, Kiel Institute for the World Economy.

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