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Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules


  • publications
  • 2017
  • Editeur : Elsevier
  • publié Economic Modelling
  • Vol. 65
  • p. 138-146
  • 9 p.
  • Référence : 2017.14
  • Auteur(s) : COMBES [J-L] , MINEA [A] , SOW [M]
    Abstract / Résumé : We investigate the reaction of fiscal policy to the business cycle in a panel of 56 developed, emerging and developing economies over 1990–2011. While we strengthen the established finding that fiscal policy is counter-cyclical, additional outcomes emerge from this study. We reveal a non-linear response of fiscal policy to the business cycle, conditional upon the outstanding debt stock. Interestingly, when the public debt-to-GDP ratio goes beyond our endogenously estimated threshold of 87%, fiscal policy turns pro-cyclical. To tackle this effect, we explore the role of fiscal rules (FR). We unveil heterogeneous impacts among FR, as only some of them may mitigate fiscal policy procyclicality in high-debt contexts.