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Cyclical expenditure policy, output volatility and economic growth

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  • Harald Badinger

Abstract

This article provides an empirical assessment of the relation between the cyclicality of fiscal expenditure policy, output volatility and economic growth, using a cross-section of 88 countries over the period 1960 to 2004. Identification of the effects of (endogenous) cyclical expenditure policy is achieved by exploiting the exogeneity of countries’ political and institutional characteristics, which we find to be relevant determinants of the cyclicality of expenditures. There are three main results: first, both pro- and countercyclical expenditure policy amplify output volatility, much in a way like pure fiscal shocks; second, output volatility, due to variations in cyclical and discretionary fiscal policy, is negatively associated with economic growth; third, there is no direct effect of cyclicality on economic growth other than through output volatility.

Suggested Citation

  • Harald Badinger, 2012. "Cyclical expenditure policy, output volatility and economic growth," Applied Economics, Taylor & Francis Journals, vol. 44(7), pages 835-851, March.
    • Handle: RePEc:taf:applec:44:y:2012:i:7:p:835-851
    DOI: 10.1080/00036846.2010.524630
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    1. Philippe Aghion & Ioana Marinescu, 2008. "Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 251-278, National Bureau of Economic Research, Inc.
    2. Torsten Persson & Guido Tabellini, "undated". "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Working Papers 189, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Easterly, William, 2005. "National Policies and Economic Growth: A Reappraisal," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 15, pages 1015-1059, Elsevier.
    4. Ricardo J. Caballero, 2008. "Comment on "Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?"," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 279-286, National Bureau of Economic Research, Inc.
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    Cited by:

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    2. Mahalia Jackman, 2014. "Output Volatility and Tourism Specialization in Small Island Developing States," Tourism Economics, , vol. 20(3), pages 527-544, June.

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