Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars

January 1, 2006

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Paolo Manasse. Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars, (USA: International Monetary Fund, 2006) accessed November 23, 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

This paper assesses the roles of shocks, rules, and institutions as possible sources of procyclicality in fiscal policy. By employing parametric and nonparametric techniques, I reach the following four main conclusions. First, policymakers' reactions to the business cycle is different depending on the state of the economy-fiscal policy is "acyclical" during economic bad times, while it is largely procyclical during good times. Second, fiscal rules and fiscal responsibility laws tend to reduce the deficit bias on average, and seem to enhance, rather than to weaken, countercyclical policy. However, the evidence also suggests that fiscal frameworks do not exert independent effects when the quality of institutions is accounted for. Third, strong institutions are associated to a lower deficit bias, but their effect on procyclicality is different in good and bad times, and it is subject to decreasing returns. Fourth, unlike developed countries, fiscal policy in developing countries is procyclical even during (moderate) recessions; in "good times," however, fiscal policy is actually more procyclical in developed economies.

Subject: Fiscal policy, Fiscal rules, Fiscal stance, Output gap, Production, Public debt

Keywords: Africa, Budget deficit, Business cycle, Constant term, Debt-to-GDP ratio, Deficit bias, Deficit ratio, Developed country, Fiscal policy, Fiscal rules, Fiscal stance, GDP ratio to the output gap, Government stability, Institutions, Output gap, Procyclicality, Reaction function, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/027
Stock No:

WPIEA2006027
ISBN:

9781451862874
ISSN:

1018-5941

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