Fiscal Policy Discretion, Private Spending, and Crisis Episodes
Banque de France
University of Palermo
Ricardo M. Sousa
University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics
December 1, 2011
Banque de France Working Paper No. 354
In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for– in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run – especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability.
Number of Pages in PDF File: 44
Keywords: fiscal policy discretion, GDP growth, private consumption, private investment, crowding-in, crowding-out
JEL Classification: E0, E6working papers series
Date posted: December 12, 2011
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