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Cyclical Ratcheting in Government Spending: Evidence from the OECD

Zvi Hercowitz () and Michel Strawczynski ()

No 2001.09, Bank of Israel Working Papers from Bank of Israel

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 welfare and short-sighted considerations is applied to panel data set covering the 1975-1998 period. The main finding is that the prolonged rise in the government spending/GDP ratio is partially explained by cyclical ratcheting: the spending/GDP ratio increases during recessions and its reduction in expansions is only partial. The long-run ratcheting effect is estimated as approximately 2 percent of GDP. Also analyzed are the cyclical changes in the composition of government spending (goods and services, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness.

Keywords: Cyclical ratcheting; government spending; output drift (search for similar items in EconPapers)
JEL-codes: E62 H50 H60 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2001-04
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ftp://repec-boi.northeurope.cloudapp.azure.com/RePEc/boi/wpaper/WP_2001.09.pdf First version, 2001 (application/pdf)

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