Cyclical Expenditure Policy, Output Volatility, and Economic Growth

Badinger, Harald (2012) Cyclical Expenditure Policy, Output Volatility, and Economic Growth. Applied Economics, 44 (7). pp. 835-851. ISSN 0003-6846


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This paper provides a comprehensive empirical assessment of the relation between the cyclicality of fiscal expenditure policy, output volatility, and economic growth, using a large 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 that are unrelated to the cycle. 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. These findings advocate the introduction of fiscal rules that limit the use of (discretionary and) cyclical fiscal (expenditure) policy to improve growth performance by reducing volatility. (author's abstract)

Item Type: Article
Additional Information: To see the final version of this paper please visit the publisher's website. Access to the published version requires a subscription.
Keywords: Cyclical Fiscal Policy / Output Volatility / Economic Growth / Institutions
Classification Codes: JEL E3, E6, H3, H8
Divisions: Departments > Volkswirtschaft > Internationale Wirtschaft
Version of the Document: Draft
Variance from Published Version: Not applicable
Depositing User: Dissertation Administrator
Date Deposited: 28 Mar 2011 11:07
Last Modified: 19 Mar 2017 18:59
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