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Procyclical Fiscal Policy: Shocks, Rules, and Institutions - A View From MARS

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Author Info
Paolo Manasse

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Abstract

This paper assesses the roles of shocks, rules, and institutions as possible sources of procyclicality in fiscal policy. By employing parametric and nonparametric techniques, I reach the following four main conclusions. First, policymakers' reactions to the business cycle is different depending on the state of the economy-fiscal policy is "acyclical" during economic bad times, while it is largely procyclical during good times. Second, fiscal rules and fiscal responsibility laws tend to reduce the deficit bias on average, and seem to enhance, rather than to weaken, countercyclical policy. However, the evidence also suggests that fiscal frameworks do not exert independent effects when the quality of institutions is accounted for. Third, strong institutions are associated to a lower deficit bias, but their effect on procyclicality is different in good and bad times, and it is subject to decreasing returns. Fourth, unlike developed countries, fiscal policy in developing countries is procyclical even during (moderate) recessions; in "good times," however, fiscal policy is actually more procyclical in developed economies.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/27.

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Length: 41 pages
Date of creation: 06 Feb 2006
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Handle: RePEc:imf:imfwpa:06/27

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October. [Downloadable!] (restricted)
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  3. 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 Economics Department. [Downloadable!]
  4. Aaron Tornell & Philip R. Lane, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March. [Downloadable!] (restricted)
  5. Paolo Manasse & Nouriel Roubini, 2005. "'Rules of Thumb' for Sovereign Debt Crises," International Finance 0509003, EconWPA. [Downloadable!]
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  6. Paolo Manasse, 2005. "Deficit Limits, Budget Rules and Fiscal Policy," IMF Working Papers 05/120, International Monetary Fund. [Downloadable!]
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  7. Tanner, Evan, 2004. "Fiscal rules and countercyclical policy: Frank Ramsey meets Gramm-Rudman-Hollings," Journal of Policy Modeling, Elsevier, vol. 26(6), pages 719-731, September. [Downloadable!] (restricted)
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  8. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August. [Downloadable!] (restricted)
  9. Alessandra Casella, 1999. "Tradable deficit permits:efficient implementation of the Stability Pact in the European Monetary Union," Economic Policy, CEPR, CES, MSH, vol. 14(29), pages 321-362, October. [Downloadable!] (restricted)
  10. Oya Celasun & Xavier Debrun & Jonathan D. Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach," IMF Staff Papers, Palgrave Macmillan Journals, vol. 53(3), pages 3. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ignacio Lozano & Jorge Toro, 2007. "Fiscal Policy Throughout the Cycle: The Colombian Experience," BORRADORES DE ECONOMIA 002730, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Ignacio Lozano & Jorge Toro, . "Fiscal Policy Throughout the Cycle: The Colombian Experience," Borradores de Economia 434, Banco de la Republica de Colombia. [Downloadable!]
  3. G. C. Lim & Paul D. McNelis, 2006. "Fiscal and Current Account Balances in a Model with Sticky Prices and Distortionary Taxes," Melbourne Institute Working Paper Series wp2006n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  4. George Kopits, 2007. "Fiscal Responsibility Framework: International Experience and Implications for Hungary," MNB Occasional Papers 2007/62, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
  5. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Enrique Alberola & José M. Montero, 2006. "Debt sustainability and procyclical fical policies in Latin America," Banco de España Working Papers 0611, Banco de España. [Downloadable!]
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