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How to make discretionary fiscal policy countercyclical

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  • Pedro Leão
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    Abstract

    In most countries, discretionary fiscal policy has often been pro-cyclical: instead of dampening the business cycle, actual discretionary policy has mostly magnified it. This paper proposes a mechanism that allows discretionary fiscal policy to be counter-cyclical. This involves the creation of a Budget Agency which carries out expenditures that, in addition to increasing its debt, also raise its saleable assets - and, therefore, do not reduce the net value of its balance-sheet. One example is the construction, during a downswing, of housing and office buildings that will be sold in the subsequent upswing. Besides real estate investment, the Budget Agency may also undertake “balance-sheet neutral” expenditures in two other sectors responsible for the bulk of business cycle fluctuations: business investment and durable consumption.

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    File URL: http://pascal.iseg.utl.pt/~depeco/wp/wp022012.pdf
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    Bibliographic Info

    Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2012/02.

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    Date of creation: Jan 2012
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    Handle: RePEc:ise:isegwp:wp022012

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    Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
    Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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    Keywords: stabilization; discretionary fiscal policy; business cycle.;

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    1. Antonio Fatas & Ilian Mihov, 2009. "The Euro and Fiscal Policy," NBER Working Papers 14722, National Bureau of Economic Research, Inc.
    2. Mark Hallerberg & Rolf Strauch, 2002. "On the Cyclicality of Public Finances in Europe," Empirica, Springer, vol. 29(3), pages 183-207, September.
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