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Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure

  • Fabrizio Coricelli

    ()

    (Paris School of Economics)

  • Riccardo Fiorito

    ()

    (Università degli Studi di Siena)

In this paper we suggest a new measure of discretionary government spending for OECD countries over the period 1980-2011. To identify the components of discretionary expenditure, we use the volatility and persistence properties of the expenditure series. Discretionary policy cannot be inertial and should be free from prior obligations. Commonly used measures of discretionary fiscal policy do not satisfy these two criteria. We find that discretionary expenditure accounts on average for about 30 percent of total primary expenditure, suggesting that most government spending is driven by inertial and automatic components. These features help explain why government expenditure is generally not counter-cyclical even in advanced economies. Furthermore, the small share of discretionary expenditure over total expenditure significantly reduces the room of manoeuvre for counter-cyclical fiscal policy during recessions.

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Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers LuissLab with number 13106.

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Date of creation: 2013
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Handle: RePEc:lui:lleewp:13106
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  1. Afonso, António & Agnello, Luca & Furceri, Davide, 2008. "Fiscal policy responsiveness, persistence and discretion," Working Paper Series 0954, European Central Bank.
  2. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November.
  3. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  4. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
  5. Martin Larch & Alessandro Turrini, 2009. "The cyclically-adjusted budget balance in EU fiscal policy making : A love at first sight turned into a mature relationship," European Economy - Economic Papers 374, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  6. Willem Adema & Pauline Fron & Maxime Ladaique, 2011. "Is the European Welfare State Really More Expensive?: Indicators on Social Spending, 1980-2012; and a Manual to the OECD Social Expenditure Database (SOCX)," OECD Social, Employment and Migration Working Papers 124, OECD Publishing.
  7. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  8. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  9. Riccardo Fiorito, 1997. "Stylized Facts of Government Finance in the G-7," IMF Working Papers 97/142, International Monetary Fund.
  10. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
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