Cyclicality of Fiscal Policy: Permanent and Transitory Shocks

37 Pages Posted: 9 Apr 2009

See all articles by Michel Strawczynski

Michel Strawczynski

Hebrew University of Jerusalem - Dept. of Economics and School of Public Policy; Hebrew University of Jerusalem _ Public Policy

Joseph Zeira

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR); LUISS Guido Carli, DPTEA

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 2009

Abstract

This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be counter cyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are counter cyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not.

Keywords: Business Cycles, Fiscal Policy, Permanent and Transitory Shocks

JEL Classification: E32, E61, E62

Suggested Citation

Strawczynski, Michel and Zeira, Joseph, Cyclicality of Fiscal Policy: Permanent and Transitory Shocks (April 9, 2009). Available at SSRN: https://ssrn.com/abstract=1375564 or http://dx.doi.org/10.2139/ssrn.1375564

Michel Strawczynski

Hebrew University of Jerusalem - Dept. of Economics and School of Public Policy

Mount Scopus
Jerusalem
Israel

Hebrew University of Jerusalem _ Public Policy ( email )

School of Public Policy
Jerusalem
Israel
972-2-5881531 (Phone)

Joseph Zeira (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem 91905, Jerusalem 91905
Israel
+972 2 588 3256 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

LUISS Guido Carli, DPTEA ( email )

viale Pola 12
Roma, Roma 00198
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
99
Abstract Views
846
Rank
445,274
PlumX Metrics