Cyclicality of Fiscal Policy over the Business Cycle: an Empirical Study on Developed and Developing Countries

Bogdan Bogdanov ()

No 12010en, Working paper series from Agency for Economic Analysis and Forecasting

Abstract: This paper presents strong empirical evidence that automatic stabilizers and countercyclical fiscal policy decrease output volatility. The conducted empirical analysis proves the economic intuition that the automatic fiscal stance is countercyclical, regardless of the size and the prosperity of the economy. Connecting our empirical results to the Endogenous Growth Theory, we develop the idea that countercyclical fiscal policy boosts long-term economic growth. We conduct the study on two samples of countries – developed and developing. We recognize the fiscal policy pattern of the developed nations to be countercyclical, whereas the one of the developing countries to be acyclical. The derived results support our hypothesis that countercyclical fiscal policy reduces output volatility as the volatility of per capita output of the developed nations appear significantly less than the one of the developing countries. We identify possible determinants of fiscal policy in good and bad times. We empirically recognize that openness to trade, terms of trade, level of corruption and financial development affect fiscal policy in both samples of countries.

Keywords: fiscal policy; automatic stabilizers; discretionary policy; output volatility; determinants (search for similar items in EconPapers)
JEL-codes: C23 E32 E62 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2010
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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