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Dynamics of government spending cyclicality

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  • Jalles, João Tovar
Abstract
Government spending policy has an important macroeconomic stabilization role. We empirically revisit the computation of fiscal cyclicality measures by employing a novel time-varying approach while explicitly dealing with endogeneity concerns. Analyzing a sample of 36 advanced economies from 1970 to 2015, the focus of the paper is on the spending side of the budget and its components. The average government spending cyclicality is −0.9, pointing to sample counter-cyclicality. However, there is considerable cross-country heterogeneity: in less than 50 percent of the sample, cyclicality coefficients are negative and statistically significant. We also uncover that government spending has become increasingly more countercyclical between 1970 and mid-1990s. Several factors drive the degree of spending cyclicality. More developed economies (more open to trade) tend to have a smaller (higher) degree of spending procyclicality. Countries with larger governments and those with better institutions are able to provide more fiscal stabilization.

Suggested Citation

  • Jalles, João Tovar, 2021. "Dynamics of government spending cyclicality," Economic Modelling, Elsevier, vol. 97(C), pages 411-427.
    • Handle: RePEc:eee:ecmode:v:97:y:2021:i:c:p:411-427
    DOI: 10.1016/j.econmod.2020.04.010
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    Cited by:

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    2. Aleksandr Arsenev & Philipp Heimberger & Bernhard Schütz, 2024. "Das konjunkturelle Verhalten der Staatsausgaben für Gesundheit und Soziales in Österreich und Deutschland: Wie robust ist die OECD-Methodik?," wiiw Research Reports in German language 25, The Vienna Institute for International Economic Studies, wiiw.
    3. Afonso, António & Carvalho, Francisco Tiago, 2022. "Time-varying cyclicality of fiscal policy: The case of the Euro area," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    4. António Afonso & Francisco Tiago Carvalho, 2021. "Euro area time-varying cyclicality of fiscal policy," Working Papers REM 2021/0202, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    5. Ma, Yong & Lv, Lin, 2023. "Financial development, financial instability, and fiscal policy volatility: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    6. João Tovar Jalles & Youssouf Kiendrebeogo & Raphael Lam & Roberto Piazza, 2024. "Revisiting the countercyclicality of fiscal policy," Empirical Economics, Springer, vol. 67(3), pages 877-914, September.
    7. Aleksandr Arsenev & Philipp Heimberger & Bernhard Schütz, 2023. "The Cyclical Behaviour of Government Spending for Social Protection: Is the OECD Methodology Robust?," wiiw Working Papers 238, The Vienna Institute for International Economic Studies, wiiw.
    8. Arrouna Keita & Camelia Turcu, 2020. "Natural Resource Discoveries and Fiscal Discipline," Working Papers 2020.07, International Network for Economic Research - INFER.
    9. Chrysanthakopoulos, Christos & Tagkalakis, Athanasios, 2023. "Fiscal rules and tax policy cyclicality," Economics Letters, Elsevier, vol. 225(C).

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    More about this item

    Keywords

    Government expenditure; Budgetary components; Time-varying coefficients; Weighted least squares; Panel data; Executive constraints;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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