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Fiscal Policy as a Stabilization Tool

Listed author(s):
  • Fatás, Antonio
  • Mihov, Ilian

We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8749.

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Date of creation: Jan 2012
Handle: RePEc:cpr:ceprdp:8749
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  1. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
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  8. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-652, August.
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  12. 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.
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  14. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
  15. Jaejoon Woo, 2009. "Why Do More Polarized Countries Run More Procyclical Fiscal Policy?," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 850-870, November.
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