Fiscal Policy During Absorption Cycles

February 1, 2011

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Format: Chicago

Ferhan Salman, and Gabriela Dobrescu. Fiscal Policy During Absorption Cycles, (USA: International Monetary Fund, 2011) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Domestic absorption cycles are relevant in assessment and design of fiscal policies. Our cross-country analysis covers 59 advanced and emerging countries for the 1990-2009 period. We show that ignoring domestic absorption cycles leads to biased fiscal stance indicators, for both advanced and emerging economies, by up to 1.5 percent of GDP. The estimates of fiscal policy reaction functions indicate that absorption booms are associated with pro-cyclical fiscal policy. We tackle the endogeneity problem in reactions functions through stripping the cyclical component of the fiscal aggregates. We also find that simple filtering methods in the computation of absorption gaps perform as better as indirect methods of estimating trade balance gaps and stripping of output gaps.

Subject: Balance of payments, Current account, Fiscal policy, Fiscal stance, Macro-fiscal analysis, Output gap, Production

Keywords: Absorption gap, Asset price cycle, Current account, Domestic absorption, Fiscal policy, Fiscal policy behavior, Fiscal policy reaction, Fiscal policy stance, Fiscal reaction function, Fiscal stance, Global, Macro-fiscal analysis, Output gap, Reaction function, Structural fiscal balance, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/041
Stock No:

WPIEA2011041
ISBN:

9781455218004
ISSN:

1018-5941

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