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Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure

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  • Fabrizio Coricelli

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPR - Centre for Economic Policy Research)

  • Riccardo Fiorito

    ()
    (Università degli Studi di Siena - Facoltà di Economia "Richard M. Goodwin")

Abstract

In 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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00820820.

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Date of creation: Apr 2013
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Handle: RePEc:hal:cesptp:halshs-00820820

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Keywords: Discretion; government spending; volatility;

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  1. Fatás, Antonio & Mihov, Ilian, 2002. "The Case for Restricting Fiscal Policy Discretion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3277, C.E.P.R. Discussion Papers.
  2. Riccardo Fiorito, 1997. "Stylized Facts of Government Finance in the G-7," IMF Working Papers 97/142, International Monetary Fund.
  3. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responiveness, Persistence and Discretion," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2008/50, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 100(3), pages 763-801, June.
  5. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, Elsevier, vol. 87(12), pages 2661-2675, December.
  6. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  7. Willem Adema & Pauline Fron & Maxime Ladaique, 2011. "Is the European Welfare State Really More Expensive?: Indicators on Social Spending, 1980-2012; and a Manual to the OECD Social Expenditure Database (SOCX)," OECD Social, Employment and Migration Working Papers 124, OECD Publishing.
  8. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  9. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  10. Martin Larch & Alessandro Turrini, 2009. "The cyclically-adjusted budget balance in EU fiscal policy making : A love at first sight turned into a mature relationship," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 374, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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Cited by:
  1. Greg Hannsgen, 2013. "Heterodox Shocks," Economics Working Paper Archive wp_766, Levy Economics Institute.

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