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Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence

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  • Karin Mayr

    ()

  • Johann Scharler

    ()

Abstract

This paper studies the implications of asymmetric fiscal stabilization policy for the budget deficit. In our model, the government is more concerned about downturns than upturns in economic activity and therefore conducts fiscal stabilization policy in a precautionary way. We show that this type of behavior results in a deficit which on average exceeds its target levelt. We test our hypothesis empirically and find that asymmetric preferences for output stabilization are consistent with how fiscal policy was conducted in a sample of OECD countries during 1987-2005. According to our estimates, the upward bias due to precautionary behavior accounted for roughly 13 percent of the average deficit.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0908.pdf
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Bibliographic Info

Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0908.

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Date of creation: May 2009
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Handle: RePEc:vie:viennp:0908

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Web page: http://www.univie.ac.at/vwl

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Cited by:
  1. Roberta Moreira Wichmann & Marcelo Savino Portugal, 2014. "Política Fiscal Assimétrica: O Caso Do Brasil," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 038, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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