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Governments under influence: Country interactions in discretionary fiscal policy

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  • Cassette, Aurélie
  • Creel, Jérôme
  • Farvaque, Etienne
  • Paty, Sonia

Abstract

We investigate the interactions between countries, and their effect on the discretionary (i.e. the cyclically-adjusted and interest-adjusted) components of national fiscal policies, observing and investigating the parts of public spending and tax receipts over which governments retain full discretion. Our sample includes 18 OECD countries for the period 1974–2008. First, we construct a measure of a discretionary fiscal policy from the residual component in a VAR model. We then compute this measure for the full sample. Using these data, we next run estimations of the discretionary fiscal policy interactions among the countries in the sample. Our results show that public decisions are affected by interactions between neighbor countries, neighborhood being defined by economic leadership as well as geography. We found evidence of opportunistic behavior by OECD country governments in relation to discretionary public spending. Finally, our estimation results reveal the crucial leadership role played by the USA in relation to discretionary fiscal policy decisions in Europe.

Suggested Citation

  • Cassette, Aurélie & Creel, Jérôme & Farvaque, Etienne & Paty, Sonia, 2013. "Governments under influence: Country interactions in discretionary fiscal policy," Economic Modelling, Elsevier, vol. 30(C), pages 79-89.
  • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:79-89 DOI: 10.1016/j.econmod.2012.08.032
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    1. repec:gam:jecnmx:v:4:y:2016:i:1:p:6:d:63356 is not listed on IDEAS
    2. Mustafa Koroglu & Yiguo Sun, 2016. "Functional-Coefficient Spatial Durbin Models with Nonparametric Spatial Weights: An Application to Economic Growth," Econometrics, MDPI, Open Access Journal, vol. 4(1), pages 1-16, February.
    3. Degiannakis, Stavros & Duffy, David & Filis, George & Livada, Alexandra, 2016. "Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?," Economic Modelling, Elsevier, vol. 52(PB), pages 551-563.
    4. Chortareas, Georgios & Mavrodimitrakis, Christos, 2016. "Can monetary policy fully stabilize pure demand shocks in a monetary union with a fiscal leader?," Economic Modelling, Elsevier, vol. 54(C), pages 463-468.

    More about this item

    Keywords

    Fiscal policy; Discretion; Interactions; VAR; Spatial econometrics;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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