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Counter-cyclical Fiscal Policy in Developed Countries: Does Governance Hinder?

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  • Nguyen Van Bon

Abstract

Fiscal policy is an effective instrument in helping governments in developed countries overcome a recession with a high unemployment rate or a hot economy with a high inflation rate to keep the economy on a stable path. Does governance contribute significantly to keeping this goal in these countries? The study looks for an answer by empirically investigating the role of governance in the output gap - fiscal policy relationship for a group of 27 developed countries between 2002 and 2019. It employs the difference GMM Arellano-Bond estimators and the PMG estimator for estimation and robustness check. The results provide some interesting findings. Firstly, both public spending and government revenue are counter-cyclical, confirming the counter-cyclical fiscal policy in developed countries. Secondly, governance hinders the counter-cyclical fiscal policy. The findings imply some crucial policies for governments in developed countries in running the fiscal policy.

Suggested Citation

  • Nguyen Van Bon, 2022. "Counter-cyclical Fiscal Policy in Developed Countries: Does Governance Hinder?," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(6), pages 482-508.
    • Handle: RePEc:prg:jnlpep:v:2022:y:2022:i:6:id:814:p:482-508
    DOI: 10.18267/j.pep.814
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    References listed on IDEAS

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    1. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    2. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    3. Andrew Abbott & Philip Jones, 2013. "Procyclical government spending: a public choice analysis," Public Choice, Springer, vol. 154(3), pages 243-258, March.
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    More about this item

    Keywords

    Counter-cyclical fiscal policy; governance; developed countries;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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