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Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence

This paper studies the implications of asymmetric fiscal stabilization policy for the budget deficit. In our model, the government is more concerned about downturns than upturns in economic activity and therefore conducts fiscal stabilization policy in a precautionary way. We show that this type of behavior results in a deficit which on average exceeds its target levelt. We test our hypothesis empirically and find that asymmetric preferences for output stabilization are consistent with how fiscal policy was conducted in a sample of OECD countries during 1987-2005. According to our estimates, the upward bias due to precautionary behavior accounted for roughly 13 percent of the average deficit.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0908.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0908.

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Date of creation: May 2009
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Handle: RePEc:vie:viennp:0908
Contact details of provider: Web page: http://www.univie.ac.at/vwl

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  1. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  2. Bent E. Sorensen & Lisa Wu & Oved Yosha, 1999. "Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994," Research Working Paper 99-05, Federal Reserve Bank of Kansas City.
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  9. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 325-345.
  10. Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy often Procyclical?," CESifo Working Paper Series 1556, CESifo Group Munich.
  11. Alesina, Alberto & Cohen, Gerald D. & Roubini, Nouriel, 1993. "Electoral business cycle in industrial democracies," European Journal of Political Economy, Elsevier, vol. 9(1), pages 1-23, March.
  12. Velasco, Andres, 2000. "Debts and deficits with fragmented fiscal policymaking," Journal of Public Economics, Elsevier, vol. 76(1), pages 105-125, April.
  13. Torsten Persson & Gerard Roland & Guido Tabellini, 2005. "Electoral Rules and Government Spending in Parliamentary Democracies," Levine's Working Paper Archive 784828000000000024, David K. Levine.
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  15. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
  16. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
  17. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  18. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
  19. Philippe Aghion & Ioana Marinescu, 2008. "Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 251-278 National Bureau of Economic Research, Inc.
  20. Sven Jari Stehn & Daniel Leigh, 2009. "Fiscal and Monetary Policy During Downturns; Evidence From the G7," IMF Working Papers 09/50, International Monetary Fund.
  21. Ruge-Murcia, Francisco J., 2003. "Does the Barro-Gordon model explain the behavior of US inflation? A reexamination of the empirical evidence," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1375-1390, September.
  22. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
  23. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
  24. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  25. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  26. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
  27. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
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