Fiscal policy reaction to the cycle in the OECD: pro- or counter-cyclical?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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 procyclical, 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. Terms of use: Documents in EconStor mayJEL-Code: E320, E620, H210, H300, H600, C330.Keywords: fiscal policy, pro-cyclicality, counter-cyclicality, OECD countries. Balázs Égert OECD Economics DepartmentParis / France balazs.egert@oecd.org OECD Economics Department. This is one of the background papers for the OECD's project on counter-cyclical economic policy. The main paper was issued as the OECD Economics Department Working Paper No. 760. The author is grateful to Jorgen Elmeskov, Peter Hoeller, Jean-Luc Schneider, Oliver Röhn and Douglas Sutherland for useful comments and suggestions and Susan Gascard for excellent editorial support. Introduction and main findings 1.This paper analyses the fiscal policy reaction to the cycle in OECD countries during the last 30 years or so. It studies the behaviour of observed and planned cyclically-unadjusted and adjusted government balances and the components of government spending and revenues over the cycle. The paper also investigates whether fiscal policy reactions are linear or whether they depend on the size of the public debt and of government balances or the position in the cycle, whether the results are sensitive to alternative measures of the cycle, the estimation methods used or the inclusion of different sets of control variables. The results can be summarised as follows. 2.First, cyclically-unadjusted balances 2 are positively correlated with the output gap or GDP growth, implying an improving balance during an expansion and a worsening balance during economic slowdowns. In other words, overall fiscal policy (including automatic stabilisers and discretionary actions) was counter-cyclical. If asymmetries are allowed over the cycle, unadjusted balances were more countercyclical during downturns than during expansions. 3.Second, di...

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