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Development and the cyclicality of government spending in the Czech Republic

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  • Szarowska, Irena

Abstract

This paper aims to provide direct empirical evidence on business cycle relations between GDP and government spending in the Czech Republic. Government spending plays an important role in a fiscal policy as a possible automatic stabilizer. We analyzed annual data on government spending in compliance with the COFOG international standard. We use cross-correlation on cyclically filtered adjusted time series over the period 1995-2008. The cyclical properties of GDP and government spending function were, in average, found as weakly correlated. However, we report considerable differences in correlations across the spending functions. The lowest correlation coefficient (0.06) was found for recreation, culture and religion and the highest average was reported for economic affairs (-0.51). As regards to using government spending as the stabilizer, total government spending, general public services, defense, economic affairs and education spending were negative correlated and it confirms countercyclical relation between these spending functions and GDP. It is in line with theory suggestion. On the other hand, the highest spending function (social protection) correlated weak positive and it mean procyclical development. The results of Johansen cointegration test proved the existence of long-run relationship between GDP and total government spending, public order and safety and economic affairs.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32353.

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Date of creation: May 2011
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Handle: RePEc:pra:mprapa:32353

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Keywords: Government spending; cyclicality; economic growth; correlation; cointegration.;

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  1. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Levine's Bibliography 784828000000000465, UCLA Department of Economics.
  2. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers, Trinity College Dublin, Department of Economics 20022, Trinity College Dublin, Department of Economics.
  3. Fiorito, Riccardo & Kollintzas, Tryphon, 1992. "Stylized Facts of Business Cycles in the G7 from a Real Business Cycles Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 681, C.E.P.R. Discussion Papers.
  4. Rajkumar, Andrew Sunil & Swaroop, Vinaya, 2008. "Public spending and outcomes: Does governance matter?," Journal of Development Economics, Elsevier, Elsevier, vol. 86(1), pages 96-111, April.
  5. Ganelli, Giovanni, 2010. "The international effects of government spending composition," Economic Modelling, Elsevier, Elsevier, vol. 27(3), pages 631-640, May.
  6. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," IDB Publications 6797, Inter-American Development Bank.
  7. 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.
  8. repec:fth:inadeb:326 is not listed on IDEAS
  9. Abbott, Andrew & Jones, Philip, 2011. "Procyclical government spending: Patterns of pressure and prudence in the OECD," Economics Letters, Elsevier, Elsevier, vol. 111(3), pages 230-232, June.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  11. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  12. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 156-190, October.
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