Fiscal space and the procyclicality of fiscal policy: the case for making hay while the sun shines

Journal article


Ahmad, Asif, McManus, Richard and Ozkan, Gulcin 2021. Fiscal space and the procyclicality of fiscal policy: the case for making hay while the sun shines. Economic Inquiry.
AuthorsAhmad, Asif, McManus, Richard and Ozkan, Gulcin
Abstract

Utilizing data from 133 countries over the period 1950-2014, we identify fiscal space - the ability to pursue active fiscal policy without undermining fiscal sustainability - as a key factor underlying the cyclicality of fiscal policies. We find that less fiscal space induces greater fiscal procyclicality; and the reduction in fiscal space in high income countries in the post-global financial crisis period prevented these economies from adopting countercyclical fiscal policies. We also show that this relationship is non-linear such that countries in the bottom tail of the fiscal space distribution need to make significant improvements before they are able to perform countercyclical policy. Taken together with the increasingly dominant role of fiscal action in downturns, as is highlighted in the context of the responses to the Covid-19 crisis, these findings clearly indicate the importance of building fiscal space in good times to provide capacity for countercyclical policy in bad times.

KeywordsFiscal policy; Fiscal cyclicality; Fiscal space; Recession
Year2021
JournalEconomic Inquiry
PublisherWiley
ISSN0095-2583
1465-7295
Publication process dates
Accepted21 Apr 2021
Deposited07 Jun 2021
Accepted author manuscript
File Access Level
Restricted
Output statusIn press
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https://repository.canterbury.ac.uk/item/8x8q7/fiscal-space-and-the-procyclicality-of-fiscal-policy-the-case-for-making-hay-while-the-sun-shines

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