Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960-2016

95 Pages Posted: 17 Sep 2018

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Yothin Jinjarak

Victoria University of Wellington - School of Economics & Finance

Hien Thi Kim Nguyen

Victoria University of Wellington

Donghyun Park

Asian Development Bank - Economic Research

Date Written: September 2018

Abstract

This paper compares fiscal cyclicality across advanced and developing countries, geographic regions as well as income levels over 1960–2016 period, then identifies factors that explain countries’ government spending and tax-policy cyclicality. Public debt/tax base ratio provides a more robust explanation for government-spending cyclicality than public debt/output ratio but the reverse is true when capital investment is accounted for in government spending. On average, a more indebted (relative to tax base) government spends more in good times and cuts back spending indifferently compared with a low-debt country in bad times. We also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. Finally, the analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space, that is, a 10% increase of public debt/tax base ratio is associated with an upper bound of 5.9% increase in government-spending procyclicality.

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Suggested Citation

Aizenman, Joshua and Jinjarak, Yothin and Nguyen, Hien Thi Kim and Park, Donghyun, Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960-2016 (September 2018). NBER Working Paper No. w25012. Available at SSRN: https://ssrn.com/abstract=3246835

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yothin Jinjarak

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Hien Thi Kim Nguyen

Victoria University of Wellington

P.O. Box 600
Wellington, 6140
New Zealand

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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