Recognizing the Bias: Financial Cycles and Fiscal Policy

Nina Budina, Borja Gracia, Xingwei Hu and Sergejs Saksonovs

No 2015/246, IMF Working Papers from International Monetary Fund

Abstract: This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

Keywords: WP; debt; price; housing cycles; public debt; private debt; debt bias; bias estimate; state dummy; growth shock; growth episode; output gap downturn; cycle episode; house-price shock; house price episode; house price cycles result in a public sector debt bias; cycles result in a public sector debt bias; house price cycle episode; Housing prices; Financial cycles; Global (search for similar items in EconPapers)
Pages: 30
Date: 2015-11-24
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Citations: View citations in EconPapers (7)

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Working Paper: Recognizing the Bias: Financial Cycles and Fiscal Policy (2015)
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