Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence

Karin Mayr-Dorn and Johann Scharler

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper studies the implications of asymmetric fiscal stabilization policy for the budget deficit. In our model, the government is more concerned about downturns than upturns in economic activity and therefore conducts fiscal stabilization policy in a precautionary way. We show that this type of behavior results in a deficit which on average exceeds its target level. We test our hypothesis empirically and find that asymmetric preferences for output stabilization are consistent with how fiscal policy was conducted in a sample of OECD countries during 1987-2005. According to our estimates, the upward bias due to precautionary behavior accounted for roughly 13 percent of the average deficit.

JEL-codes: E32 E60 H62 (search for similar items in EconPapers)
Date: 2009-05
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Persistent link: https://EconPapers.repec.org/RePEc:vie:viennp:vie0908

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