How to make discretionary fiscal policy countercyclical

Pedro Leão

No 2012/02, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: In most countries, discretionary fiscal policy has often been pro-cyclical: instead of dampening the business cycle, actual discretionary policy has mostly magnified it. This paper proposes a mechanism that allows discretionary fiscal policy to be counter-cyclical. This involves the creation of a Budget Agency which carries out expenditures that, in addition to increasing its debt, also raise its saleable assets - and, therefore, do not reduce the net value of its balance-sheet. One example is the construction, during a downswing, of housing and office buildings that will be sold in the subsequent upswing. Besides real estate investment, the Budget Agency may also undertake “balance-sheet neutral” expenditures in two other sectors responsible for the bulk of business cycle fluctuations: business investment and durable consumption.

Keywords: stabilization; discretionary fiscal policy; business cycle. (search for similar items in EconPapers)
JEL-codes: E32 E62 E63 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-mac
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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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