Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules |
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| Institution: | 1. Universitas Mercatorum, Italy;2. Governance and Economics Research Network, Spain;3. Oxford Brookes University (UK), Department of Accounting Finance and Economics, Wheatley Campus, OX33 1HX, UK;1. Universität Erfurt, Faculty of Economics, Law and Social Sciences, Chair for International Economics, Nordhäuser Straße, 99089 Erfurt, Germany;2. Deutscher Bundestag, Platz der Republik, Büro Margaret Horb, MdB, 11011 Berlin, Germany;1. Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K, Denmark;2. Department of Economics, University of California, Santa Cruz, Santa Cruz, CA 95064, USA;3. Department of Economics, Copenhagen Business School, Porcelaenshaven 16A, 2000 Frederiksberg C, Denmark |
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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. |
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| Keywords: | Business cycle Fiscal policy Public debt Fiscal Rules Non-linear effects |
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