Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules

Jean-Louis Combes, Alexandru Minea and Mousse Ndoye Sow
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Mousse Ndoye Sow: CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique

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Abstract: We investigate the reaction of fiscal policy to the business cycle in a panel of 56 developed, emerging and developing economies over 1990–2011. While we strengthen the established finding that fiscal policy is counter-cyclical, additional outcomes emerge from this study. We reveal a non-linear response of fiscal policy to the business cycle, conditional upon the outstanding debt stock. Interestingly, when the public debt-to-GDP ratio goes beyond our endogenously estimated threshold of 87%, fiscal policy turns pro-cyclical. To tackle this effect, we explore the role of fiscal rules (FR). We unveil heterogeneous impacts among FR, as only some of them may mitigate fiscal policy procyclicality in high-debt contexts.

Keywords: Business; cycle; Fiscal; policy; Public; debt; Fiscal; Rules; Non-linear; effects (search for similar items in EconPapers)
Date: 2017-09
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Citations: View citations in EconPapers (55)

Published in Economic Modelling, 2017, 65, pp.138 - 146. ⟨10.1016/j.econmod.2017.05.017⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01682627

DOI: 10.1016/j.econmod.2017.05.017

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