Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries

Mackiewicz, Michał (2008): Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries.

Abstract

In this paper we examine factors that make some governments revert to procyclical fiscal policies despite the standard normative prescription being to conduct fiscal policy countercyclically. In order to avoid the pitfalls of the two-step methods previous studies have typically used we used a one-step method with interaction variables. We found robust statistical evidence that procyclical fiscal policies are typically run by countries with weak institutions. There was also some empirical support for a hypothesis that countries that have accumulated a high debt-to-GDP ratio tend to run procyclical fiscal policies, possibly as a result of the financial constraints. We found no evidence that any other variable among the ones suggested in the literature explains the way in which governments react to the business cycle.

• Item Type: MPRA Paper
• Language: English
• Keywords: procyclical fiscal policy, financial constraints, fiscal institutions
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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