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Should We Pay Attention to Indicators of Fiscal Impact on Demand?

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Abstract

This paper looks at five different ways in which the effect of fiscal policy on aggregate demand in the short term can be empirically estimated, and asks two questions: First, given the assumption that fiscal policy has the same effect across countries, which of the five indicators is the empirically best measure of fiscal impact on demand? Second, is it reasonable to interpret fiscal policy indicators similarly across countries, or does the effect of fiscal policy on demand differ to a degree that makes this unreasonable? Running a panel regression of changes in aggregate demand on the five measures of fiscal policy in turn frpr OECD countries, the conclusion is that OECD's structural budget balance measure seems to be the more plausible measure of fiscal impact on demand. Moreover, testing the restriction that the five measures have identical parameters across OECD countries is rejected in five all cases.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 01-2002.

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Length: 30
Date of creation: 01 Feb 2002
Date of revision:
Handle: RePEc:gii:giihei:heiwp01-2002

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Keywords: Fiscal policy; Fiscal indicators; Demand; Fiscal impulse; Structural budget balance; Fiscal Impact;

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  1. George L. Perry & Charles L. Schultze, 1993. "Was This Recession Different? Are They All Different?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 145-212.
  2. G. A. Mackenzie, 1989. "Are All Summary Indicators of the Stance of Fiscal Policy Misleading?," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 743-770, December.
  3. repec:imf:imfocp:44 is not listed on IDEAS
  4. Garry J. Schinasi, 1986. "International comparisons of fiscal policy: the OECD and the IMF measures of fiscal impulse," International Finance Discussion Papers 274, Board of Governors of the Federal Reserve System (U.S.).
  5. repec:fth:banfra:60 is not listed on IDEAS
  6. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Working Papers 4765, National Bureau of Economic Research, Inc.
    • Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80 National Bureau of Economic Research, Inc.
  7. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  8. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
  9. Braconier, Henrik & Holden, Steinar, 1999. "The Public Budget Balance - Fiscal Indicators and Cyclical Sensitivity in the Nordic Countries," Working Paper 67, National Institute of Economic Research.
  10. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  11. Eisner, Robert, 1989. "Budget Deficits: Rhetoric and Reality," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 73-93, Spring.
  12. Bhargava, A & Franzini, L & Narendranathan, W, 1982. "Serial Correlation and the Fixed Effects Model," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 533-49, October.
  13. Garry J. Schinasi & Mark Scott Lutz, 1991. "Fiscal Impulse," IMF Working Papers 91/91, International Monetary Fund.
  14. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  15. Bruneau, C. & De Bandt, O., 1999. "Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model," Working papers 60, Banque de France.
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Cited by:
  1. Michael Kumhof & Douglas Laxton, 2009. "Simple, Implementable Fiscal Policy Rules," IMF Working Papers 09/76, International Monetary Fund.

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