Procyclical Fiscal Policy: Shocks, Rules, and Institutions - a View from Mars

41 Pages Posted: 3 Mar 2006

See all articles by Paolo Manasse

Paolo Manasse

Università degli Studi di Bologna - Department of Economics; IGIER, Bocconi University; International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: January 2006

Abstract

This paper assesses the roles of shocks, rules, and institutions as possible sources of procyclicality in fiscal policy. By employing parametric and nonparametric techniques, I reach the following four main conclusions. First, policymakers' reactions to the business cycle is different depending on the state of the economy - fiscal policy is "acyclical" during economic bad times, while it is largely procyclical during good times. Second, fiscal rules and fiscal responsibility laws tend to reduce the deficit bias on average, and seem to enhance, rather than to weaken, countercyclical policy. However, the evidence also suggests that fiscal frameworks do not exert independent effects when the quality of institutions is accounted for. Third, strong institutions are associated to a lower deficit bias, but their effect on procyclicality is different in good and bad times, and it is subject to decreasing returns. Fourth, unlike developed countries, fiscal policy in developing countries is procyclical even during (moderate) recessions; in "good times", however, fiscal policy is actually more procyclical in developed economies.

Keywords: Fiscal policy, fiscal rules, procyclicality, institutions

JEL Classification: E62, E63, H62, C45, D78

Suggested Citation

Manasse, Paolo, Procyclical Fiscal Policy: Shocks, Rules, and Institutions - a View from Mars (January 2006). IMF Working Paper, Vol. , pp. 1-41, 2006. Available at SSRN: https://ssrn.com/abstract=888172

Paolo Manasse (Contact Author)

Università degli Studi di Bologna - Department of Economics ( email )

Via Strada Maggiore, 45
I-40125 Bologna
Italy
+39 05 1209 2613 (Phone)

IGIER, Bocconi University

Via Sarfatti 25
20136 Milan, MI 20136
Italy
+39 02 5836 3326 (Phone)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

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