Working Paper: CEPR ID: DP8749
Authors: Antonio Fatás; Ilian Mihov
Abstract: We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades.
Keywords: business cycles; fiscal policy; stabilization
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Automatic stabilizers (E63) | Output stabilization (E63) |
| Discretionary fiscal policy (E62) | Output stabilization (E63) |
| Government size (H11) | Effectiveness of automatic stabilizers (E63) |
| Output growth (O40) | Budget balance deterioration (H69) |
| Size of automatic stabilizers (E63) | Discretionary fiscal policy use (E62) |
| Fiscal policy (E62) | Business cycles (E32) |