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Real-time fiscal policy responses in the OECD from 1997 to 2018: Procyclical but sustainable?

Pierre Aldama () and Jerome Creel ()

European Journal of Political Economy, 2022, vol. 73, issue C

Abstract: This paper presents empirical evidence of asymmetric fiscal policy along the business cycle, using a real-time panel dataset on 19 OECD countries from 1997 to 2018. We estimate various specifications of fiscal policy reactions, in which ex ante fiscal policy has two major objectives: macroeconomic stabilization and fiscal consolidation. First, we find evidence in favour of asymmetric fiscal policy along the business cycle, in particular regarding the response to output gap. Second, fiscal policy appears to be procyclical in downturns and a-cyclical in upturns. Third, we find evidence that fiscal policy is sustainable but we do not find evidence of stronger fiscal consolidation in downturns. Our results are robust to alternative estimators, to an alternative measure of business cycle and to country exclusion. In particular, the procyclical bias of fiscal policy during downturns seems largely driven by the years following the Global Financial Crisis.

Keywords: Fiscal policy rules; Real-time data; Asymmetric stabilization; Fiscal consolidation (search for similar items in EconPapers)
JEL-codes: E61 E62 H6 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ejpoleco.2021.102135

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European Journal of Political Economy is currently edited by J. De Haan, A. L. Hillman and H. W. Ursprung

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