Countercyclical Fiscal Policy Research Articles

Fiscal Rules and Countercyclical Fiscal Policy in Russia

Fiscal Rules and Countercyclical Fiscal Policy in Russia

The Mundell‑Fleming Model and Macroeconomic Stabilization Policies

This paper analyzes the fiscal policy implications set in the Mundell‑Fleming (M‑F) model and its effectiveness in emerging economies. It also widens the scope of the policy mix with alternative exchange rates. The empirical evidence about the economies of Chile (1991–2003) and Colombia (1994–2004), about institutions, fiscal policy rule, and the eurozone conditions (1999), were considered relevant The paper has three sections a. The budget‑surplus fiscal policy rule and policy effectiveness, b. The role of institutions in setting policy rules, c. The experience of the Chilean and Colombian economies concerning fiscal policy rules within the M‑F framework. The main conclusion is that as long as country risk is lower due to countercyclical fiscal policy rules, governments have an alternative means of getting funds at a lower international interest rate. The fiscal policy effect on GDP (output)becomes positive.

An Alternative Approach to Assess the Impacts of Countercyclical Fiscal Policy in Developing Countries

In the current literature, theoretical, and empirical studies present varying implications regarding the effectiveness of countercyclical fiscal policy in stabilizing the economy. While most studies suggest that countercyclical fiscal policy stimulates or inhibits economic growth, others document insignificant impact. However, these existing studies solely analyze the impulse of fiscal policy to the economy without distinguishing whether the impulse factor originates from within or outside the economy. Therefore, we aim to explore the effectiveness of countercyclical fiscal policy within an alternative framework that discerns the origin of the impulse factor and revisits the impacts of countercyclical policy in developing countries. Our theoretical framework argues that the countercyclical fiscal policy only makes sense if it is conducted with external debt or other external instruments. Employing the dataset that covers 201 countries over the 1990-2020 periods, we document evidence for the use of countercyclical fiscal policy in developing countries.

Weather shocks and exchange rate flexibility

AbstractThis paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy's adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium‐term adverse growth impact of a 1°C increase in temperature under a pegged regime is about −1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (−0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. Importantly, there is evidence of nonlinear effects, whereby greater exchange rate flexibility can be more beneficial for EMDCs with hotter climates. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.

The Relationship of Fiscal Policy and Economic Cycle: Is Vietnam Different?

Fiscal policy is one of the most crucial areas of government economic policy, and it has the potential to influence the economic growth of any nation. According to traditional Keynesian and Ricardian theories, fiscal policy should not be pro-cyclical, and counter-cyclical fiscal policy is the most effective alternative. Furthermore, the periodicity of fiscal policy is also heavily influenced by the quality of political institutions and democracies. Thus, this paper examines the relationship between fiscal policy and economic cycle in Vietnam, a developing economy with dramatic change since 2000. The results support the causal relationship between the set of fiscal policy factors, such as public debt, government tax revenues, and government expenditures, by analyzing quarterly data over a twenty-year period beginning in 2000 by using the Vector Error-Correction Model (VECM). Therefore, the adaptation of fiscal policy to the phases of the economic cycle and the effective deployment of fiscal policy tools help the sustainability of public finances and stimulate economic growth.

Assessing the impact of fiscal rules on the cyclicality of government expenditures

The paper analyzes the impact of fiscal rules on the cyclicality of non- interest public spending. It is concluded that for both developed and developing countries for 1995—2019 non-interest public spending is procyclical, and having at least one fiscal rule at the national level reduces the procyclicality of spending. The reaction to the introduction of a fiscal rule depends on the existence of institutional conditions for its successful application. The presence and rigidity of the rules are offset by the possible non-compliance with them. Fiscal rules are not a sufficient condition for a counter-cyclical fiscal policy and do not guarantee a solution to the problems of debt burden and stabilization of expenditures. Hardly 22 out of 49 countries that have applied at least one fiscal rule for 5 years and for which data for at least 10 years of non-interest spending are available show counter-cyclical non-interest spending behavior, and only 7 of them managed to reduce their debt burden after the introduction of a system of fiscal restrictions.

What Makes Discretionary Counter-Cyclical Fiscal Policy so Difficult? An Analysis of 32 OECD Countries

Abstract We examine the stance of fiscal policy for 32 OECD countries from 1986 to 2023 by comparing for each country-year observation the signs of the output gap and the change in the cyclically adjusted budget balance. We find that fiscal policies are often pro-cyclical. We test possible explanations using comparative statistics for country-year observations with pro- and counter-cyclical policies. Our evidence suggests that fiscal rules and institutional quality are not related to the prevalence of pro-cyclicality. Likewise, several political-economy arguments suggested for explaining pro-cyclical fiscal policies do not receive strong support. However, poor access to finance makes fiscal policies more pro-cyclical. (JEL codes: E62, H50, and H62)

Fiscal multipliers and structural economic characteristics: Evidence from countries in sub‐Saharan Africa

AbstractOutput response to discretionary fiscal policy is a key aspect of examining various theories, findings of empirical studies and delivering guidance to policymakers. This study analyses the output response to unanticipated fiscal spending shocks under several structural economic characteristic factors, including business cycle states, debt burden, openness of the economy, exchange rate regimes and political governance regime, using annual data from 40 countries in SSA spanning from 2000 to 2019 in a panel threshold vector auto‐regression model. The findings indicate that fiscal spending multipliers have much larger effects on output in times of recession, in economies operating under lower trade openness, a fixed exchange rate, low‐debt burden, restricted capital mobility, less financial development and a democratic governance regime. Based on the results, the discretionary countercyclical fiscal policy and optimal fiscal policy action are recommended. Moreover, in order to have effective fiscal policy must target hand‐to‐mouth consumers (non‐Ricardian consumers) and firms with limited liquidity, concentrating on social services and social protection to increase short‐term demand. Likewise, A proper fiscal monetary policy mix should be considered with other structural measures to maximising the positive effects of the fiscal expansion.

Fiscal rules and the cyclicality of fiscal policy in the East African community

ABSTRACT We examine the cyclicality of government expenditure and the impact of fiscal rules in a panel of five East African Community (EAC) countries using annual data for the period 1980–2019. The analysis is based on pooled ordinary least squares and panel autoregressive distributed lag regressions. We find that government consumption is acyclical while investment is procyclical. In addition, we find suggestive evidence that fiscal policy became less procyclical following the adoption of fiscal rules consistent with the EAC macroeconomic convergence criteria. These results highlight the importance of strengthening the scope and implementation of existing fiscal rules to facilitate the complete transition to countercyclical fiscal policy stance.

Fiscal Policy and Monetary Integration in the Ecowas

Those with dissenting view regarding the structure of monetary union arrangement in ECOWAS often argue that the macroeconomic convergence criteria have hampered the ability of countries in the region to stabilize their economies with appropriate counter-cyclical fiscal policy. We test the empirical merit of this assertion and found no support for this view. Instead, discretionary fiscal policy has actually become counter-cyclical in ECOWAS after the introduction of convergence criteria. In specifics, we found a switch from pro-cyclical fiscal policymaking in the pre-convergence era (1995–2002) to a counter-cyclical fiscal policymaking in the convergence era (2003–2018) in ECOWAS, and that policymakers in the region respond to initial conditions - apparently taking clue from past (initial) debt and past deficit. The policy import of our result is the need to: (i) introduce more flexibility in fiscal policymaking through discretionary fiscal policy that balances the budget (against the constraints imposed by the convergence rules) over the business cycle; and (ii) adopt ‘discretionary fiscal deficit’ to monitor compliance (rather than gross deficit) because it represents effort made to correct excess deficit.

The asymmetric effect of fiscal policy on private consumption and private investment over a business cycle: Evidence from Sub‐Saharan African countries

AbstractThis study examines the response of private consumption and private investment to an exogenous shock of fiscal policy and estimates the size of fiscal multipliers during periods of economic slacks and positive output gap. Panel vector autoregressive (VAR) estimation technique is performed on a sample of 18 Sub‐Saharan African (SSA) countries for the period 2000–2018. The study finds that the output’s fiscal impact multiplier is larger during contractions than during expansion. Furthermore, in contractions, the fiscal multipliers are 0.06% for private consumption and 0.6% for private investment. Meanwhile, in expansions, they are −0.03 for private consumption and −0.04% for private investment. The findings of this study are consistent with the results of previous studies predicting Keynesian views. Thus, to earn sizable, persistent, and long‐lasting effects through fiscal policy, this study recommends that spending programs should account for countercyclical fiscal policy and consider consumption and investment decisions before implementation. Moreover, the fiscal spending interventions tend to target rule‐of‐thumb households and financially constrained firms.

Резервные фонды в регионах России: факторы учреждения и оценка эффективности

The article considers the main characteristics of the Russian Federation subjects’ reserve funds analyzes the factors of their formation and assesses their effectiveness through the lens of the regions’ countercyclical fiscal policy. In theory, reserve funds serve not only as a source of additional budgetary funds, but also as an instrument of anti-crisis policy and financial stability. In practice, the reserve funds of Russian regions are believed not to fulfill the designated tasks, although the number of relevant studies is extremely limited. The latter determines the relevance of this study. The authors establish that the regional reserve fund of the subject as a public-law entity was established only in about half of the Russian regions and in many respects their creation coincided with the recovery growth after the crisis of 2009–2010. The theoretical provisions are also consistent with the fact that on average the reserve fund is owned by the entities whose economy is more dependent on the mining industry, has greater fiscal capacity, is less subsidized and has a lower level of debt. At the same time, greater fiscal capacity or debt sustainability can hardly be considered as factors in the creation of reserve funds. A number of models are constructed to assess the effectiveness of reserve funds of Russian regions from the point of view of countercyclical fiscal policy. It is concluded that reserve funds in their current form are ineffective for smoothing regional expenditures and maintaining overall fiscal stability. Nevertheless, many questions remain in this topic, including alternative model specifications and evaluation techniques. Based on the results obtained, the directions for further research are formulated.

Achieving Two Policy Targets With One Policy Instrument: Heterogeneous Expectations, Countercyclical Fiscal Policy, and Macroeconomic Stabilization at the Effective Lower Bound

Achieving Two Policy Targets With One Policy Instrument: Heterogeneous Expectations, Countercyclical Fiscal Policy, and Macroeconomic Stabilization at the Effective Lower Bound

Фіскальні правила в забезпеченні боргової безпеки України

The aim of the article is to deepen and develop the scientific foundations of disclosure of the essence and significance of fiscal rules in the budget process, the features of their practical application in the countries of the world in the context of strengthening the debt security of Ukraine. The article systematizes fiscal rules by kinds, provides an essential characterization, identifies the disadvantages and advantages of their practical application in order to manage the debt security of the State. The popularity and frequency of application of various kinds of fiscal rules in the budget process of 106 countries of the world for the period from 1990 to 2021 are determined, some visual graphs are built. The distribution of fiscal rules by kinds in the context of economic groups of the countries of the world is carried out, an assessment of their effectiveness in the implementation of counter-cyclical fiscal policy is provided. The practice of using fiscal rules in the budget process of Ukraine is disclosed, the reasons for violation of their marginal indicators during military aggression are determined. The need to use a combination of different kinds of fiscal rules in order to achieve positive effects on debt security and level the cyclical nature of fiscal policy is emphasized. Proposals for improving the process of public debt management in the context of ensuring the optimal level of debt security of Ukraine are substantiated. Prospect for further research in this direction is to prove the need to restore the system of fiscal rules after the end of the war and bring it to the requirements of the European Union, taking into account the European integration vector of Ukraine’s development.

Counter-cyclical Fiscal Policy in Developed Countries: Does Governance Hinder?

Fiscal policy is an effective instrument in helping governments in developed countries overcome a recession with a high unemployment rate or a hot economy with a high inflation rate to keep the economy on a stable path. Does governance contribute significantly to keeping this goal in these countries? The study looks for an answer by empirically investigating the role of governance in the output gap - fiscal policy relationship for a group of 27 developed countries between 2002 and 2019. It employs the difference GMM Arellano-Bond estimators and the PMG estimator for estimation and robustness check. The results provide some interesting findings. Firstly, both public spending and government revenue are counter-cyclical, confirming the counter-cyclical fiscal policy in developed countries. Secondly, governance hinders the counter-cyclical fiscal policy. The findings imply some crucial policies for governments in developed countries in running the fiscal policy.

A Reformist Thought to Fiscal Reform and Budget Management

The Fiscal Reform and Budget Management (FRBM) Act 2003 (and its subsequent amendments) and similar fiscal responsibility laws were legislated to rein in fiscal deficits often driven by factors other than economic imperative. This paper shows that such laws have not promoted counter-cyclical fiscal policy because of a lacuna in design, viz. measurement of fiscal deficit-as-a-share of gross domestic product (GDP). The remedy lies in targeting the cyclically adjusted fiscal deficit-as-a-share-of potential GDP instead, which correctly reflects the true fiscal position, allowing elbowroom for appropriate fiscal action for macroeconomic-stabilisation. The paper discusses ways to institutionalise the same and way forward therein.

Maliye Politikası Çevrim Yanlısı Mı Yoksa Çevrim Karşıtı mı? Türkiye için ARDL Yaklaşımından Kanıtlar

An essential part of the ongoing normative debate on how to design the cyclical movements of fiscal policy practices argues that counter-cyclical fiscal policies based on the Keynesian view should be preferred to pro-cyclical practices because of their stabilizing effects. In this context, the empirical analysis of the cyclical behavior of fiscal policy is an area that is up to date, first introduced by Gavin and Perotti (1997). The common opinion of empirical studies is that counter-cyclical practices are applied in developed economies; pro-cycle practices are more common in developing and underdeveloped economies. This study examines the cyclical movements of fiscal policy practices in Turkiye from 1990-2020 with the ARDL method. As a result of the study, findings were obtained that Turkiye's fiscal policy practices have a counter-cyclical structure but lose its fiscal space for a maneuver. The robustness tests also support the findings.

Fiscal Stimulus in the European Union to Stabilize the COVID Shock

We document fiscal policies adopted in 2020 in five major European Union (EU) countries to deal with the COVID-19 pandemic. Then, we show the correlations between fiscal indicators and GDP growth. Economic stabilization was easier in countries where the budget deficit and the public debt were relatively small, with more room for maneuvers to conduct a counter-cyclical fiscal policy. Besides, the increase in public expenditure (cash transfers) did not always correlate with economic growth, whereas preserving government revenue was important in the case of tax cuts. More precisely, regarding the fiscal revenues of the EU member countries in 2020, reducing the weight on corporate income taxation, to sustain production supply and wealth creation by firms, was correlated with higher economic growth. Stylized facts show that the recession was weaker in countries where the relative weight of indirect taxation on household consumption increased, as in the Nordic countries.

Risk-sharing and consumption-smoothing patterns in the US and the Euro Area: A comprehensive comparison

We compare the fraction of asymmetric shocks smoothed in the United States and in the Euro Area through risk-sharing channels. By building on a novel dataset, the paper addresses key comparability issues in the literature. Our findings confirm that total risk sharing is higher in the United States and that capital markets are a more powerful shock-absorption channel than in the Euro Area, but less so than previously reported. We also provide a detailed comparison of risk-sharing mechanisms over time and in the face of longer-lasting shocks. Our results suggest that the financial crisis was associated with a reduction in risk sharing through capital markets in the United States, while during the sovereign debt crisis counter-cyclical fiscal policies allowed for higher consumption smoothing in the Euro Area. Finally, both in the United States and in the Euro Area risk sharing tends to decline as shocks become more persistent.

Promoting Counter-Cyclical Fiscal Policy: Fiscal Rules Versus Institutions

We explore under different exchange rate regimes how fiscal rules and institutions can reduce the procyclical stance of fiscal policy (i.e. how government spending responds to GDP fluctuations). We construct a fiscal rules index which is a composite index measuring the overall strength of fiscal rules in a country at a given time. We use it in a dynamic model with a GMM estimator, for a panel of 153 countries over the period 1993-2015. We find that under fixed exchange rate regimes, while better institutions can reduce procyclicality, rules increase it or do not affect it. This result suggests that under fixed exchange rate regimes, a focus should be put on stronger institutional quality rather than on the adoption of fiscal rules. However, under flexible exchange rate regimes, we find that institutions and rules are complementary in reducing procyclicality. Rules help reduce procyclicality and are more effective, in particular, when institutions are stronger. Our results are robust to different specifications as well as to the use of alternative variables of institutional quality.