Cyclicality of Fiscal Policy: Permanent and Transitory Shocks

Strawczynski, Michel and Zeira, Joseph (2009) Cyclicality of Fiscal Policy: Permanent and Transitory Shocks. In: Seminarios de Macroeconomía y Finanzas del Banco Central año 2009, 24 de septiembre 2009, Banco Central de Chile (Santiago, Chile).

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This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be counter cyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are counter cyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not.

Item Type: Conference or Workshop Item (Paper)
Research documents and activity classification: Conference Items > International Conferences > Invited Submissions
Divisions: Department of Business and Management
Uncontrolled Keywords: Business Cycles, Fiscal Policy, Permanent and Transitory Shocks.
MIUR Scientific Area: Area 13 - Economics and Statistics > SECS-P/01 Political Economy
Deposited by: Maria Teresa Nisticò
Date Deposited: 22 Dec 2010 15:47
Last Modified: 22 Apr 2015 00:14


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