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Cyclical Ratcheting in Government Spending: Evidence from the OECD

Author

Listed:
  • Zvi Hercowitz

    () (Tel Aviv University, 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 welfare and short-sighted considerations is applied to panel data set covering the 1975-1998 period. The main finding is that the prolonged rise in the government spending/GDP ratio is partially explained by cyclical ratcheting: the spending/GDP ratio increases during recessions and its reduction in expansions is only partial. The long-run ratcheting effect is estimated as approximately 2 percent of GDP. Also analyzed are the cyclical changes in the composition of government spending (goods and services, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness.

Suggested Citation

  • Zvi Hercowitz & Michel Strawczynski, 2001. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," Bank of Israel Working Papers 2001.09, Bank of Israel.
  • Handle: RePEc:boi:wpaper:2001.09
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    References listed on IDEAS

    as
    1. Mark Hallerberg & Jürgen von Hagen, 1999. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Chapters,in: Fiscal Institutions and Fiscal Performance, pages 209-232 National Bureau of Economic Research, Inc.
    2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    3. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
    4. Hallerberg, Mark & von Hagen, Jürgen, 1997. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits within the European Union," CEPR Discussion Papers 1555, C.E.P.R. Discussion Papers.
    5. de Haan, Jakob & Sturm, Jan-Egbert & Beekhuis, Geert, 1999. "The Weak Government Thesis: Some New Evidence," Public Choice, Springer, vol. 101(3-4), pages 163-176, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cyclical ratcheting; government spending; output drift;

    JEL classification:

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

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