Evaluating Fiscal Policy Under Cyclical Balance in Developed Countries

Abstract

Abstract This study investigates the cyclical patterns of fiscal policy rules using various policy variables that respond to the macroeconomic performance of developed countries over the past few decades. The study reveals that regardless of whether the economy is in a recession or a boom, fiscal policy basically displays counter-cyclical behavior. However, the degree of cyclicality varies depending on the output gap measurements chosen and the countries analyzed. Additionally, the estimates using various fiscal policy indicators demonstrate a strong time variation in fiscal cyclical behavior, resulting in a significant increase in the counter-cyclicality of the fiscal balance. The article also applies the time-varying coefficients vector autoregression model to assess the effects of fiscal policy on output and finds that a boost in the cyclically adjusted primary balance positively impacts production in the short run.