Description

We study empirically the reaction of fiscal policy to changes in the permanent and
 transitory components of GDP in a panel of countries. We find evidence that government
 spending tends to be counter-cyclical conditional on temporary shocks and pro-cyclical
 conditional on permanent shocks. We also find no evidence that developing countries are
 systematically different from developed ones in terms of fiscal policy. We present a theory
 featuring a fiscal reaction function to the output gap and a measure of debt sustainability.
 The fiscal impulse response to a permanent (temporary) shock to GDP is positive
 (negative) as the effect on debt sustainability (current output gap) dominates. The results
 are mostly sensitive to the relative weight of debt sustainability in the fiscal reaction
 function as well as to the extent of real rigidities in the economy.

More publications in this series: Working Papers

More publications by: Karim Barhoumi ; Reda Cherif ; Nooman Rebei