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Cyclical Ratcheting in Government Spending: Evidence from the OECD

Zvi Hercowitz () and Michel Strawczynski ()

The Review of Economics and Statistics, 2004, vol. 86, issue 1, 353-361

Abstract: This paper studies the role of business cycles in the phenomenon of increasing government-spending/GDP ratios in the OECD countries. An empirical framework that includes both long-run and cyclical considerations in the determination of government spending is applied to panel data covering 1975-1998. The main finding is that the prolonged rise in the spending/GDP ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior: the ratio increases during recessions and is only partially reduced in expansions. The long-run ratcheting effect is estimated as approximately 2% of GDP. Also analyzed are the cyclical changes in the composition of government spending (government consumption, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness. 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2004
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