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Deep Roots of Fiscal Behavior

Serhan Cevik () and Katerina Teksoz

No 14/45, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the determinants of fiscal policy behavior and its time-varying volatility, using panel data for a broad set of advanced and emerging market economies during the period 1990–2012. The empirical results show that discretionary fiscal policy is influenced by policy inertia, the level of public debt, and the output gap in both advanced and emerging market economies. In addition, the paper finds that macro-financial factors—such as real exchange rate, financial development, interest rates, asset prices, and natural resource rents—and demographic and institutional factors—such as the old-age dependency ratio, the quality of institutions, and policy anchors such as fiscal rules and IMF-supported stabilization programs—tend to have a significant effect on fiscal policy behavior. The results also indicate that higher government debt leads to more volatile fiscal behavior, while fiscal rules and higher institutional quality reduce the volatility of fiscal policy over time.

Keywords: Emerging markets; Financial crises; Economic models; Cross country analysis; Developed countries; Fiscal policy; fiscal reaction functions, fiscal policy volatility, budget balance, discretionary fiscal policy, fiscal reaction, primary budget balance, General, Deficit, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2014-03-12
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