On estimates of overall budget sensitivity parameters across income groups: Some evidence

This note provides estimates of the overall budget sensitivity parameter for different income groups over the 2010-2021 period. The results reveal a positive and statistically significant response of the cyclical component of the fiscal balance in response to changes in the output gap. There is however varying degrees of the strength of the estimated association across different income groups. Specifically, our estimates uncover that the budgetary sensitivity parameter is 0.40 in high income, 0.39 in upper middle income, 0.2 in lower-middle, and 0.31 in low income countries. The main findings reveal that the parameter of interest depends on the level of income. Typically, the higher the income level, the higher the budgetary sensitivity parameter. However, the budget sensitivity parameter is higher in low-income countries than in lower-middle income countries. Given the scarcity of estimates of the budget sensitivity parameter for developing countries, the note provides new and informative estimates for low- and lower-middle income countries useful for computing measurement of fiscal position.