Fiscal Policy During Absorption Cycles

Ferhan Salman and Gabriela Dobrescu

No 2011/041, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; fiscal policy; structural fiscal balance; domestic absorption; output gap; fiscal reaction function; reaction function; fiscal policy behavior; absorption gap; asset price cycle; fiscal policy reaction; fiscal policy stance; Fiscal stance; Macro-fiscal analysis; Current account; Global (search for similar items in EconPapers)
Pages: 32
Date: 2011-02-01
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Citations: View citations in EconPapers (14)

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