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

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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Submitted on : Friday, January 12, 2018 - 1:27:34 PM
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Jean-Louis Combes, Alexandru Minea, Mousse Ndoye Sow. Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules. Economic Modelling, Elsevier, 2017, 65, pp.138 - 146. ⟨10.1016/j.econmod.2017.05.017⟩. ⟨hal-01682627⟩

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