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The Timing and Responsiveness of Fiscal Policy over the Business Cycle in Germany

Koester, Gerrit B. and Priesmeier, Christoph (2015): The Timing and Responsiveness of Fiscal Policy over the Business Cycle in Germany.

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Abstract

This paper provides new empirical evidence on the timing and sensitivity of fiscal policy over the business cycle in Germany. Employing structural vector autoregressions with time-varying transmission parameters, we find that the responsiveness of the fiscal balance to output gap shocks varied substantially over the last decades. Combining output gap and fiscal balance reactions reveals three distinct fiscal regimes that gradually flow into each other. Increasing countercyclical reactions can be observed in the 1970s. This is followed by almost two decades of decreasing short-term but increasing medium-term countercylicality. A third regime is characterized by further decreases of the short-termcountercyclicality, while fiscal policy turns acyclical in the medium-term perspective. Additional analyses show, that especially changes in the degree of trade openness and the employment ratio, along with the adoption of stronger inflation targeting have driven the decline of the sensitivity of German public finances.

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