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Procyclical Fiscal Policy

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  • Paolo Manasse

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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Bibliographic Info

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

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Length: 41
Date of creation: 01 Jan 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/27

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Keywords: Financial institutions; Fiscal management; fiscal policy; fiscal rules; linear model; fiscal rule; parameter estimate; public debt; functional form; fiscal frameworks; equation; constant term; fiscal responsibility laws; foreign debt; debt service; linear regression; fiscal responsibility; samples; fiscal policy rules; fiscal policies; fiscal reaction; outliers; government spending; statistics; tax rates; survey; government budget; normal distribution; surveys; kurtosis; fiscal position; fiscal reaction function; skewness; tax base; fiscal stabilizers; dummy variable; nonlinear ? model; number of ? variables; fiscal affairs department; statistician; government budget balance; primary deficit; fiscal authorities; budgetary rules; government budget deficit; fiscal expansion; government solvency; estimation technique; budget constraint; budgetary consolidation; standard deviation; excessive deficits; discretionary fiscal policy; fitted model; budget balance; mean square; budget balances; fiscal affairs; government budget constraint; expansionary fiscal; independent variable; budget deficit; nonlinear model; budget deficits; public finances; regression analysis; fiscal performance; computations; separability; tax policy; fiscal balance; dummy variables; expansionary fiscal policies; fiscal redistribution; fiscal variables; fiscal response; taxation; bad fiscal policies; probability; fiscal reaction functions;

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References

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  1. 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.
  2. Khalid Sekkat & Marco Buti & Carlos Martinez-Mongay & Paul van den Noord, 2003. "Macroeconomic policy and structural reform: a conflict between stabilisation and flexibility?," ULB Institutional Repository 2013/7388, ULB -- Universite Libre de Bruxelles.
  3. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers.
  4. Alessandra Casella, 1999. "Tradable Deficit Permits: Efficient Implementation of the Stability Pacin the European Monetary Union," NBER Working Papers 7278, National Bureau of Economic Research, Inc.
  5. 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.
  6. Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 0077, European Central Bank.
  7. Oya Celasun & Xavier Debrun & Jonathan David Ostry, 2006. "Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries," IMF Working Papers 06/67, International Monetary Fund.
  8. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  9. Manasse, Paolo & Roubini, Nouriel, 2009. ""Rules of thumb" for sovereign debt crises," Journal of International Economics, Elsevier, vol. 78(2), pages 192-205, July.
  10. Paolo Manasse, 2005. "Deficit Limits, Budget Rules and Fiscal Policy," Macroeconomics 0509011, EconWPA.
  11. Fatás, Antonio & Mihov, Ilian, 1999. "Government Size and Automatic Stabilizers: International and Intranational Evidence," CEPR Discussion Papers 2259, C.E.P.R. Discussion Papers.
  12. 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.
  13. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  14. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  15. Fabrizio Balassone & Maura Francese, 2004. "Cyclical asymmetry in fiscal policy, debt accumulation and the Treaty of Maastricht," Temi di discussione (Economic working papers) 531, Bank of Italy, Economic Research and International Relations Area.
  16. Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
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