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Fiscal policy responsiveness, persistence and discretion

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  • Afonso, António
  • Agnello, Luca
  • Furceri, Davide

Abstract

We decompose fiscal policy in three components: i) responsiveness, ii) persistence and iii) discretion. Using a sample of 132 countries, our results point out that fiscal policy tends to be more persistent than to respond to output conditions. We also found that while the effect of cross-country covariates is positive (negative) for discretion, it is negative (positive) for persistence thereby suggesting that countries with higher persistence have lower discretion and vice versa. In particular, while government size, country size and income have negative effects on the discretion component of fiscal policy, they tend to increase fiscal policy persistence. JEL Classification: E62, H50

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Paper provided by European Central Bank in its series Working Paper Series with number 0954.

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Date of creation: Oct 2008
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Handle: RePEc:ecb:ecbwps:20080954

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Keywords: Fiscal Policy; Fiscal Volatility;

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  1. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 533-572, October.
  2. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
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  13. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
  14. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
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  17. Davide Furceri, 2007. "Is Government Expenditure Volatility Harmful for Growth? A Cross-Country Analysis," Fiscal Studies, Institute for Fiscal Studies, vol. 28(1), pages 103-120, 03.
  18. Riccardo Fiorito, 1997. "Stylized Facts of Government Finance in the G-7," IMF Working Papers 97/142, International Monetary Fund.
  19. Davide Furceri, 2010. "Long-run growth and volatility: which source really matters?," Applied Economics, Taylor & Francis Journals, vol. 42(15), pages 1865-1874.
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