Fiscal policy and volatility of business cycle

Although there are several papers in the literature that look at the theoretical effects of automatic stabilizers and its efficiency, few of them present empirical evidence. This paper conducts an empirical study of the effects of fiscal policy as an automatic stabilizer.In the first part of this paper attempt was made to study cyclicality of fiscal policy, for this purpose panel data method were applied to 8 opec member countries for the 1980-2010 period. The main purpose of this paper is to study the relationship between the fiscal policy (measured by government expenditures and tax revenues) and volatility of business cycle (measured by GDP, private GDP) among 8 opec member countries for the period 1980-2010 by applying panel data. Furthermore, we check for the robustness of our results by introducing a list of controls (openness, GDP, GDP per capital and GDP growth).The results reveal that the fiscal policy for the countries under consideration is acyclical. The results present strong and negative correlation between tax revenues (deflated by GDP) and volatility of output and also government expenditures (deflated by GDP) are positively correlated with the volatility of output. The derived results indicate that tax revenues as an efficient fiscal policy help smoothing the volatility of output while government expenditures accelerate the volatility of output. So, this results support the idea that countries which are exposed to more volatile business cycle, want to increase tax revenues (deflated by GDP) to help smoothing their volatility.