Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars

IMF Working Papers, January 1, 2006

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Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars

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Bibliographic details

• Authors: Paolo Manasse
• Published: January 1, 2006
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451862874.001

Summary and main findings

• The paper assesses roles of shocks, rules, and institutions as possible sources of procyclicality in fiscal policy using parametric and nonparametric techniques.
• Four principal conclusions:
  • First: Policymakers' reactions to the business cycle differ 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, evidence also suggests 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.

Methods and analytical approach

• Techniques employed:
  • Parametric techniques
  • Nonparametric techniques
• Focus on interaction among:
  • Shocks (business cycle states)
  • Fiscal rules and fiscal responsibility laws
  • Institutional quality

Policy-relevant implications

• Fiscal rules and fiscal responsibility laws:
  • Tend to reduce deficit bias on average.
  • Appear to enhance countercyclical policy rather than weaken it.
  • May not have independent effects once institutional quality is considered.
• Institutional quality:
  • Strong institutions correlate with lower deficit bias.
  • Impact on procyclicality varies by economic state (good vs. bad times).
  • Subject to decreasing returns (marginal gains from stronger institutions diminish).
• Country-type differences:
  • Developing countries: fiscal policy is procyclical even during moderate recessions.
  • Developed countries: fiscal policy is more procyclical during "good times."

Key statistics and publication metadata

• Pages: 41
• Volume: 2006
• Issue: 027
• Series: Working Paper No. 2006/027
• DOI: https://doi.org/10.5089/9781451862874.001
• Stock No: WPIEA2006027
• ISBN: 9781451862874
• ISSN: 1018-5941
• Author: Paolo Manasse
• Date: January 1, 2006
• Subjects: Fiscal policy, Fiscal rules, Fiscal stance, Output gap, Production, Public debt
• Keywords: Africa, budget deficit, business cycle, constant term, debt-to-GDP ratio, deficit bias, deficit ratio, developed country, Fiscal policy, fiscal rules, Fiscal stance, GDP ratio to the output gap, government stability, institutions, Output gap, procyclicality, reaction function, WP

IMF Working Paper No. 2006/027; Paolo Manasse; January 1, 2006; Pages: 41; DOI: https://doi.org/10.5089/9781451862874.001; ISBN: 9781451862874; ISSN: 1018-5941.

Content in this bundle

• 8. MARS Models
  • 8. MARS Models (Markdown version)
  • 8. MARS Models (PDF)