Working Paper: NBER ID: w25012
Authors: Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
Abstract: This paper compares fiscal cyclicality across advanced and developing countries, geographic regions as well as income levels over 1960–2016 period, then identifies factors that explain countries’ government spending and tax-policy cyclicality. Public debt/tax base ratio provides a more robust explanation for government-spending cyclicality than public debt/output ratio but the reverse is true when capital investment is accounted for in government spending. On average, a more indebted (relative to tax base) government spends more in good times and cuts back spending indifferently compared with a low-debt country in bad times. We also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. Finally, the analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space, that is, a 10% increase of public debt/tax base ratio is associated with an upper bound of 5.9% increase in government-spending procyclicality.
Keywords: Fiscal Space; Government Spending; Tax Rate Cyclicality; Cross-Country Comparison
JEL Codes: F4; H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public debt to tax base ratio (H69) | government spending procyclicality (E62) |
| sovereign wealth funds (G23) | government spending procyclicality (E62) |
| public debt to tax base ratio (H69) | government spending during economic upturns (E62) |
| public debt to tax base ratio (H69) | government spending stability during downturns (E62) |
| economic structure (share of commodity exports) (Q02) | fiscal policy cyclicality (E62) |
| inflation (E31) | fiscal policy cyclicality (E62) |
| political constraints (D72) | fiscal policy cyclicality (E62) |