Recognizing the Bias: Financial Cycles and Fiscal Policy

31 Pages Posted: 3 Feb 2016

See all articles by Nina T. Budina

Nina T. Budina

International Monetary Fund

Borja Gracia

Yale University

Xingwei Hu

International Monetary Fund (IMF)

Sergejs Saksonovs

International Monetary Fund (IMF)

Date Written: 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.

Keywords: housing cycles, private debt, debt bias, debt, price, output, prices, International Lending and Debt Problems, All Countries, debt bias.,

JEL Classification: H63, E32, F34, G01

Suggested Citation

Budina, Nina T. and Gracia, Borja and Hu, Xingwei and Saksonovs, Sergejs, Recognizing the Bias: Financial Cycles and Fiscal Policy (November 2015). IMF Working Paper No. 15/246. Available at SSRN: https://ssrn.com/abstract=2727211

Nina T. Budina (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

Borja Gracia

Yale University ( email )

New Haven, CT 06520
United States

Xingwei Hu

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Sergejs Saksonovs

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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