Recognizing the Bias: Financial Cycles and Fiscal Policy

Budina, Nina and Gracia, Borja and Hu, Xingwei and Saksonovs, Sergejs (2015): Recognizing the Bias: Financial Cycles and Fiscal Policy. Published in: IMF Working Paper No. 15/246 (24 November 2015)

Abstract

This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: housing cycles, public debt, private debt, debt bias
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G0 - General > G01 - Financial Crises; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

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