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A New Look into Fiscal Countercyclicality: Expectations, Shocks, and the Business Cycle

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  • João Tovar Jalles

Abstract

We provide a positive analysis of fiscal stabilizers by focusing on a heterogeneous sample of 84 countries between 1980 and 2015. We add to the literature by: (i) assessing fiscal cyclicality across business cycles' turning points; (ii) allowing for expectations to play a role; (iii) differentiating the effects stemming from demand and supply shocks. We find that fiscal countercyclicality is sizable across the world, particularly during recessions. Allowing for future expectations about fiscal dynamics enhances the degree of fiscal countercyclicality. Automatic stabilizers are an important component of fiscal stabilization. The fiscal response to demand shocks is higher than to supply shocks.

Suggested Citation

  • João Tovar Jalles, 2020. "A New Look into Fiscal Countercyclicality: Expectations, Shocks, and the Business Cycle," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 76(3), pages 240-265.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2020-0006
    DOI: 10.1628/fa-2020-0006
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    Keywords

    budget balance; filtering; expectations; business cycle; Blanchard-Quah decomposition;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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