Fiscal Policy as a Stabilization Tool

Fatás, Antonio and Ilian Mihov
Authors registered in the RePEc Author Service: Antonio Fatas

No 8749, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades.

Keywords: Business cycles; Fiscal policy; Stabilization (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View complete reference list from CitEc
Citations: View citations in EconPapers (62)

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Journal Article: Fiscal Policy as a Stabilization Tool (2012)
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