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Cyclical Ratcheting in Government Spending: Evidence from the OECD

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  • Zvi Hercowitz

    (Tel Aviv University and Bank of Israel)

  • Michel Strawczynski

    (Bank of Israel)

Abstract

This paper studies the role of business cycles in the phenomenon of increasing government-spending/GDP ratios in the OECD countries. An empirical framework that includes both long-run and cyclical considerations in the determination of government spending is applied to panel data covering 1975-1998. The main finding is that the prolonged rise in the spending/GDP ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior: the ratio increases during recessions and is only partially reduced in expansions. The long-run ratcheting effect is estimated as approximately 2% of GDP. Also analyzed are the cyclical changes in the composition of government spending (government consumption, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness. 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
    • Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:353-361
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    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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