Development and the cyclicality of government spending in the Czech Republic

Szarowska, Irena (2011): Development and the cyclicality of government spending in the Czech Republic.

Abstract

This paper aims to provide direct empirical evidence on business cycle relations between GDP and government spending in the Czech Republic. Government spending plays an important role in a fiscal policy as a possible automatic stabilizer. We analyzed annual data on government spending in compliance with the COFOG international standard. We use cross-correlation on cyclically filtered adjusted time series over the period 1995-2008. The cyclical properties of GDP and government spending function were, in average, found as weakly correlated. However, we report considerable differences in correlations across the spending functions. The lowest correlation coefficient (0.06) was found for recreation, culture and religion and the highest average was reported for economic affairs (-0.51). As regards to using government spending as the stabilizer, total government spending, general public services, defense, economic affairs and education spending were negative correlated and it confirms countercyclical relation between these spending functions and GDP. It is in line with theory suggestion. On the other hand, the highest spending function (social protection) correlated weak positive and it mean procyclical development. The results of Johansen cointegration test proved the existence of long-run relationship between GDP and total government spending, public order and safety and economic affairs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government spending; cyclicality; economic growth; correlation; cointegration.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies

References

[1] Abbott, A., and Jones, P.: Procyclical government spending: Patterns of pressure and prudence in the OECD. Economics Letters 111 (2011), 230–232.

[2] Alesina, A. et al.: Why is fiscal policy often procyclical? Journal of the European Economic Association 6, no. 5 (2008), 1006–1030.

[3] Fiorito, R., and Kollintzas, T.: Stylized facts of business cycles in the G7 from a real business cycles pers-pective. European Economic Review 38 (1994), 235–269.

[4] Ganelli, G.: The International Effects of Government Spending Composition. Economic Modelling 27, no. 3 (2010), 631-40.

[5] Gavin, M. et al.: Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness. IDB Working Paper No. 326, 1996.

[6] Gavin, M., and Perotti, R.: Fiscal policy in Latin America. Macroeconomics Annual 12 (1997), 11–70.

[7] Hercowitz, Z., and Strawczynski, M.: Cyclical Ratcheting in Government Spending: Evidence from the OECD. Review of Economics and Statistics 86, no. 1 (2004), 353-61.

[8] Johansen, S.: Cointegration and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autore-gressive Models. Econometrica 59, no.6 (1991), 1551–1580.

[9] Johansen, S. and Juselius, K.: (1990): Maximum Likelihood Estimation and Inference on Cointegration, with Applications. Oxford Bulletin of Economics and Statistics 52 (1990), 169–210.

[10] Lane, P. R.: International Perspectives on the Irish Economy. Economic and Social Review 29, no. 2 (1998), 217-22.

[11] Lane, P. R.: The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD. Journal of Public Eco-nomics 87, no. 12 (2003), 2661-75.

[12] Rajkumar, A. S., and Swaroop, V.: Public Spending and Outcomes: Does Governance Matter? Journal of Development Economics 86, no. 1 (2008), 96-111.

[13] Serven, L. Macroeconomic Uncertainty and Private Investment in LDCs: an Empirical Investigation. World Bank Working Paper No. 2035, 1998.

[14] Talvi, E., and Vegh, C. A.: Tax base variability and procyclical fiscal policy in developing countries. Jour-nal of Development Economics 78 (2005), 156–190.