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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

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    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.
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    More about this item

    Keywords

    Cyclical ratcheting; government spending; output drift;
    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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