Direction of Fiscal Policy in Cyclical Fluctuations: OECD Example

The main objective of this study is to determine the direction of fiscal policy in the face of cyclical fluctuations in 33 OECD countries for the period 2002-2021. In this framework, the study is based on two main research questions. The first one is ‘How is the direction of fiscal policy shaped in OECD countries in the face of cyclical fluctuations?’ The second one is: ‘Does the fact that countries have achieved a certain growth trend affect the direction of fiscal policy in the face of cyclical fluctuations?’. The first one of these questions is tested with the linear dynamic panel data method; the second one is tested with the dynamic panel threshold approach developed by Kremer et al. (2013). The findings show that the effect differs according to the fiscal policy instrument used. Accordingly, regardless of the threshold values determined, it is supported that taxes are pro-cyclical while public consumption expenditures are anti-cyclical. At the same time, the dummy variable used to differentiate the periods of economic shocks also strongly supports the countercyclicality of public consumption expenditures. These findings suggest that public expenditures can be used as a more effective tool in reducing the severity of business cycles, regardless of the level of economic growth.