Cyclical Macro Policy and Industry Growth: The effect of counter-cyclical fiscal policy

Content Provider	Semantic Scholar
Author	Kharroubi, Enisse Aghion, Philippe
Copyright Year	2008
Abstract	This paper evaluates whether and how the cyclical pattern of macro policy can affect growth. We focus on fiscal policy and study whether the degree of fiscal policy counter-cyclicality has any significant impact on growth. Following the Rajan-Zingales (1998) methodology, we draw a relationship between fiscal policy counter-cyclicality –measured at the macro leveland growth (both value added and productivity) at the sector level. We provide evidence that (i) industries have grown faster in economies where fiscal policy has been more countercyclical, both in terms of output and productivity (ii) that the positive growth effects of fiscal policy counter-cyclicality have been larger in industries which rely proportionally more on external finance. We show these two conclusions to be unaffected by a bunch of robustness checks. In particular the effect of fiscal policy counter-cyclicality is robust to the inclusion of a large number of structural macroeconomic variables, including financial development, openness to trade or net current account position. Hence, the cyclical pattern of fiscal policy is probably at least as important as can be structural features in their impact on growth. Second we use a number of different measures of fiscal policy counter-cyclicality. In particular we separate between the different components of fiscal policy (revenues and expenditures, investment and consumption) to determine which item counter-cyclicality is more important for growth. Empirical evidence seems to show that counter-cyclicality stemming from discretionary fiscal policy is more important for growth than counter-cyclicality stemming from automatic stabilizers.
File Format	PDF HTM / HTML
Alternate Webpage(s)	https://www.imf.org/external/np/seminars/eng/2008/strureform/pdf/cyclical.pdf
Alternate Webpage(s)	http://www.imf.org/external/np/seminars/eng/2008/strureform/pdf/cyclical.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article