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Fiscal policy responsiveness, persistence and discretion

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Author Info
António Afonso () (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Luca Agnello () (University of Palermo, Department of Economics, Viale delle Scienze, 90128 Palermo, Sicily, Italy.)
Davide Furceri () (OECD, 2, rue André Pascal, F-75775 Paris Cedex 16, France.)

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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 954.

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Length: 45 pages
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. [Downloadable!] (restricted)
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  2. Andrei Shleifer & Robert W. Vishny, 1998. "The Quality of Government," Harvard Institute of Economic Research Working Papers 1847, Harvard - Institute of Economic Research.
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  3. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November. [Downloadable!] (restricted)
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  4. Torsten Persson, 2001. "Do Political Institutions Shape Economic Policy?," NBER Working Papers 8214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September. [Downloadable!] (restricted)
  7. Fatás, Antonio & Mihov, Ilian, 2005. "Policy Volatility, Institutions and Economic Growth," CEPR Discussion Papers 5388, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Sorensen, Bent E. & Wu, Lisa & Yosha, Oved, 2001. "Output fluctuations and fiscal policy: U.S. state and local governments 1978-1994," European Economic Review, Elsevier, vol. 45(7), pages 1271-1310. [Downloadable!] (restricted)
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  9. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Ricardo M. Sousa & António Afonso, 2009. "Assessing Long-Term Fiscal Developments: Evidence from Portugal," NIPE Working Papers 1/2009, NIPE - Universidade do Minho. [Downloadable!]
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