Recognizing the Bias: Financial Cycles and Fiscal Policy

Author/Editor:

Nina Budina ; Borja Gracia ; Xingwei Hu ; Sergejs Saksonovs

Publication Date:

November 24, 2015

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

Series:

Working Paper No. 2015/246

Subject:

Debt bias Financial cycles Financial sector policy and analysis Fiscal policy Housing prices Prices Private debt Public debt Tax policy

English

Publication Date:

November 24, 2015

ISBN/ISSN:

9781513508863/1018-5941

Stock No:

WPIEA2015246

Pages:

30

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