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Fiscal space and government-spending and tax-rate cyclicality patterns: A cross-country comparison, 1960–2016

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  • Aizenman, Joshua
  • Jinjarak, Yothin
  • Nguyen, Hien Thi Kim
  • Park, Donghyun

Abstract

This paper compares fiscal cyclicality across advanced and developing countries, geographic regions as well as income levels over 1960–2016 period, then identifies factors that explain countries’ government spending and tax-policy cyclicality. Public debt/tax base ratio provides a more robust explanation for government-spending cyclicality than public debt/output ratio but the reverse is true when capital investment is accounted for in government spending. On average, a more indebted (relative to tax base) government spends more in good times and cuts back spending indifferently compared with a low-debt country in bad times. We also find that country's sovereign wealth fund has a countercyclical effect in our estimation. Finally, the analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space, that is, a 10% increase of public debt/tax base ratio is associated with an upper bound of 5.9% increase in government-spending procyclicality.

Suggested Citation

  • Aizenman, Joshua & Jinjarak, Yothin & Nguyen, Hien Thi Kim & Park, Donghyun, 2019. "Fiscal space and government-spending and tax-rate cyclicality patterns: A cross-country comparison, 1960–2016," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 229-252.
    • Handle: RePEc:eee:jmacro:v:60:y:2019:i:c:p:229-252
    DOI: 10.1016/j.jmacro.2019.02.006
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    4. Heimberger, Philipp, 2023. "The cyclical behaviour of fiscal policy: A meta-analysis," Economic Modelling, Elsevier, vol. 123(C).
    5. Lamia Bazzaoui & Jun Nagayasu, 2021. "Is Inflation Fiscally Determined?," Sustainability, MDPI, vol. 13(20), pages 1-26, October.
    6. Gnangnon, Sèna Kimm, 2023. "Productive capacities, structural economic vulnerability and fiscal space volatility in developing countries," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 45(3), pages 25-48.
    7. Ohnsorge, Franziska & Kose, M. Ayhan & Sugawara, Naotaka, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," CEPR Discussion Papers 14439, C.E.P.R. Discussion Papers.
    8. Katharina Bergant & Kristin Forbes, 2021. "Macroprudential Policy during COVID-19: The Role of Policy Space," NBER Working Papers 29346, National Bureau of Economic Research, Inc.
    9. Sena KIMM Gnangnon, 2020. "Export Product Diversification and Fiscal Space Volatility in Developing Countries: Exploring the Economic Growth Volatility Channel," Economics Bulletin, AccessEcon, vol. 40(3), pages 1837-1854.
    10. Claudio Borio & Juan Contreras & Fabrizio Zampolli, 2020. "Assessing the fiscal implications of banking crises," BIS Working Papers 893, Bank for International Settlements.
    11. Claudio Borio & Marc Farag & Fabrizio Zampolli, 2023. "Tackling the fiscal policy-financial stability nexus," BIS Working Papers 1090, Bank for International Settlements.
    12. Sèna Kimm Gnangnon & Jean-François Brun, 2020. "Tax reform and fiscal space in developing countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 237-265, June.
    13. Hermann D. Yohou, 2023. "Corruption, tax reform and fiscal space in emerging and developing economies," The World Economy, Wiley Blackwell, vol. 46(4), pages 1082-1118, April.
    14. Djedje Hermann Yohou, 2020. "Corruption, Tax reform and Fiscal space in Emerging and Developing Economies," Working Papers hal-02987268, HAL.
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    16. Catalina Granda-Carvajal & Danny García-Callejas, 2023. "Informality, tax policy and the business cycle: exploring the links," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(1), pages 114-166, February.
    17. De Pascale, Gianluigi & Fiore, Mariantonietta & Contò, Francesco, 2021. "Short and long run environmental tax buoyancy in EU-28: a panel study," International Economics, Elsevier, vol. 168(C), pages 1-9.
    18. Bergant, Katharina & Forbes, Kristin, 2023. "Policy packages and policy space: Lessons from COVID-19☆," European Economic Review, Elsevier, vol. 158(C).
    19. Luis Ayala-Cañón & María Jesús Delgado-Rodríguez & Sonia De Lucas-Santos, 2022. "Synchronization and cyclicality of social spending in economic crises," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(4), pages 1153-1187, November.
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    21. Gaetano Lisi, 2021. "Can the AD-AS Model Explain the Presence and Persistence of the Underground Economy? Evidence from Italy," Economies, MDPI, vol. 9(4), pages 1-11, November.

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