Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure
AbstractIn this paper we suggest a new measure of discretionary government spending for OECD countries over the period 1980-2011. To identify the components of discretionary expenditure, we use the volatility and persistence properties of the expenditure series. Discretionary policy cannot be inertial and should be free from prior obligations. Commonly used measures of discretionary fiscal policy do not satisfy these two criteria. We find that discretionary expenditure accounts on average for about 30 per cent of total primary expenditure, suggesting that most government spending is driven by inertial and automatic components. These features help explain why government expenditure is generally not counter-cyclical even is advanced economies. Furthermore, the small share of discretionary expenditure over total expenditure significantly reduces the room of manoeuvre for counter-cyclical fiscal policy during recessions.
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Date of creation: Apr 2013
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Discretion; government spending; volatility;
Other versions of this item:
- Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Documents de travail du Centre d'Economie de la Sorbonne, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Working Papers LuissLab, Dipartimento di Economia e Finanza, LUISS Guido Carli 13106, Dipartimento di Economia e Finanza, LUISS Guido Carli.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H5 - Public Economics - - National Government Expenditures and Related Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-22 (All new papers)
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