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Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules

Jean-Louis Combes (), Alexandru Minea () and Moussé Sow

Economic Modelling, 2017, vol. 65, issue C, 138-146

Abstract: We investigate the reaction of fiscal policy to the business cycle in a panel of 56 developed, emerging and developing economies over 1990–2011. While we strengthen the established finding that fiscal policy is counter-cyclical, additional outcomes emerge from this study. We reveal a non-linear response of fiscal policy to the business cycle, conditional upon the outstanding debt stock. Interestingly, when the public debt-to-GDP ratio goes beyond our endogenously estimated threshold of 87%, fiscal policy turns pro-cyclical. To tackle this effect, we explore the role of fiscal rules (FR). We unveil heterogeneous impacts among FR, as only some of them may mitigate fiscal policy procyclicality in high-debt contexts.

Keywords: E32; E62; H63; Business cycle; Fiscal policy; Public debt; Fiscal Rules; Non-linear effects (search for similar items in EconPapers)
Date: 2017
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