Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?

Abstract

This paper uses yearly panel data on OECD countries to analyze the relationship between growth and the cyclicality of government debt. We develop new time-varying estimates of the cyclicality of public debt. Our main findings can be summarized as follows: (i) less procyclical public debt growth can have significantly positive effects on productivity growth, in particular when financial development is lower; (ii) public debt growth has become increasingly countercyclical in most OECD countries over the past twenty years, but this trend has been less pronounced in the EMU; (iii) less financially developed or more open economies display less countercyclical public debt growth.

Cyclical expenditure policy, output volatility and economic growth

“…A noteable exception is Aghion and Marinescu (2008), who find a positive effect of countercyclicality measures in a growth regression, using an (unbalanced) panel of annual data for 19 OECD countries from 1960 to 2007. Moreover, no previous study has considered the relations between cyclicality, volatility and growth in a joint empirical framework.…”

“…So far, there are hardly studies investigating the effects of fiscal cyclicality on economic growth. One notable exception is Aghion and Marinescu (2008), who consider an (unbalanced) panel of annual data for 19 OECD countries from 1960 to 2007. Regressing growth on alternative cyclicality measures (and standard controls for economic growth regressions), they find a positive effect of the "countercyclicality" of fiscal policy on economic growth.…”

Credit Constraints, Cyclical Fiscal Policy and Industry Growth

“…we follow the methodology developed in the seminal paper by Rajan and Zingales (1998) and use crossindustry/cross-country panel data on a sample of 17 OECD countries over the overall period 1980-2005, to test whether industry growth is positively a¤ected by the interaction between …scal policy cyclicality (which 4 To solve this issue, Aghion and Marinescu (2007) introduce time-varying estimates of …scal policy cyclicality. While this helps controlling for unobserved heterogeneity, it comes at the cost of loosing precision in the estimates of …scal policy cyclicality.…”

Lost at Sea: The Euro Needs a Euro Treasury

“…This presumption is even more wrong-headed with regard to the ongoing euro crisis. Arguing that eurozone member countries have done too little to contain the post-crisis surge in public debt ratios stands in utter conflict with the empirical evidence on the growth impact of fiscal austerity (Aghion and Marinescu 2008, German levels. Surprisingly, however, while the ECB took over the task of maintaining price stability in the currency union as a whole, and aggregate trends in wages and unit labor costs actually stayed well below the 2 percent stability norm, no attention was paid to the critical need to prevent nominal divergences inside the currency union.…”