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

Utilizing data from 133 countries over the period 1950–2014, we identify fiscal space as a key factor underlying the cyclicality of fiscal policies. We find that less fiscal space induces greater fiscal procyclicality and show that this relationship is nonlinear; countries in the bottom tail of the...

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Bibliographic Details
Published inEconomic inquiry Vol. 59; no. 4; pp. 1687 - 1701
Main Authors Ahmad, Asif, McManus, Richard, Ozkan, F. Gulcin
Format Journal Article
LanguageEnglish
Published Huntington Beach Western Economic Association 01.10.2021
Subjects
COVID-19
fiscal cyclicality
Fiscal policy
fiscal space
recession
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Summary:Utilizing data from 133 countries over the period 1950–2014, we identify fiscal space as a key factor underlying the cyclicality of fiscal policies. We find that less fiscal space induces greater fiscal procyclicality and show that this relationship is nonlinear; countries in the bottom tail of the fiscal space distribution need to make significant improvements before they can perform countercyclical policy. Given the increasingly dominant role of fiscal action in downturns, as is highlighted during 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.
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.13008