Fiscal Space and Increasing Fiscal Resilience

42 Pages Posted: 4 May 2020

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: May 14, 2019

Abstract

The paper compares fiscal cyclicality across regions and countries from 1960 to 2016. It finds that more than half of 170 countries analyzed in seven regions had, in more recent years, limited fiscal space, and that their fiscal policy was either cyclical or procyclical. This was particularly apparent since the 2008–2009 global financial crisis, which was marked by increased procyclical government spending when accounting for net acquisition of nonfinancial assets and capital expenditure. We construct a limited-fiscal-capacity statistic, measured by public debt–average tax revenue ratio and its volatility, which is found to be positively associated with fiscal procyclicality. The cyclicality is asymmetric: on average, a more indebted government (relative to the tax base) spends more in good times and cuts back spending indifferently compared with low-debt countries in bad times. Having sovereign wealth funds is also associated with larger countercyclicality. An enduring interest rate rise entails diminished fiscal space—a 10% increase in the public debt–tax base ratio is associated with an upper bound of a 5.6% increase in government-spending procyclicality.

Keywords: cross-country analysis, fiscal cyclicality, public debt

JEL Classification: E02, E62, F40

Suggested Citation

Aizenman, Joshua and Jinjarak, Yothin and Nguyen, Hien Thi Kim and Park, Donghyun, Fiscal Space and Increasing Fiscal Resilience (May 14, 2019). Asian Development Bank Economics Working Paper Series No. 582, Available at SSRN: https://ssrn.com/abstract=3590166 or http://dx.doi.org/10.2139/ssrn.3590166

Joshua Aizenman

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 (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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