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Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-cyclical?

  • Balázs Égert

This paper analyses the reaction of fiscal policy to the cycle in OECD countries. The results suggest that while overall government balances were counter-cyclical in the past and more so in economic downturns than in upswings, discretionary fiscal policy was neutral on average. However, discretionary fiscal policy appears to react to the cycle in a non-linear fashion: fiscal policy in countries with high public debt and high government deficits tends to be pro-cyclical, while countries that have low public debt and that have surpluses are more likely to conduct a counter-cyclical fiscal policy. The paper also finds that asset prices have a significant impact on government balances.

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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-12.

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Length: 43 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-12
Contact details of provider: Postal: 200 Avenue de la République, Bât. G - 92001 Nanterre Cedex
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  1. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
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  9. Zsolt Darvas, 2009. "The impact of the crisis on budget policy in Central and Eastern Europe," Working Papers 318, Bruegel.
  10. Everts, Martin, 2006. "Duration of Business Cycles," MPRA Paper 1219, University Library of Munich, Germany.
  11. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  12. Marco Buti & Paul Noord, 2004. "Fiscal Discretion and Elections in the Early Years of EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 737-756, November.
  13. Dreher, Axel & Lamla, Michael J. & Lein, Sarah M. & Somogyi, Frank, 2009. "The impact of political leaders' profession and education on reforms," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 169-193, March.
  14. Bernoth, Kerstin & Hughes Hallett, Andrew & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
  15. Sven Jari Stehn & Daniel Leigh, 2009. "Fiscal and Monetary Policy During Downturns: Evidence From the G7," IMF Working Papers 09/50, International Monetary Fund.
  16. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  17. Beetsma, Roel & Giuliodori, Massimo, 2008. "Fiscal Adjustment to Cyclical Developments in the OECD: An Empirical Analysis Based on Real-Time Data," CEPR Discussion Papers 6692, C.E.P.R. Discussion Papers.
  18. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  19. Mankiw, N Gregory, 1987. "Government Purchases and Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 407-19, April.
  20. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2004. "Institutions and Cyclical Properties of Macroeconomic Policies," Working Papers Central Bank of Chile 285, Central Bank of Chile.
  21. Sanvi Avouyi-Dovi & Julien Matheron, 2005. "Interactions between business cycles, financial cycles and monetary policy: stylised facts," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 273-98 Bank for International Settlements.
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