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THE CYCLICALITY OF AUTOMATIC AND DISCRETIONARY FISCAL POLICY: WHAT CAN REAL-TIME DATA TELL US?

Published online by Cambridge University Press:  20 August 2013

Kerstin Bernoth ,
Andrew Hughes Hallett  and
John Lewis
Kerstin Bernoth*
Affiliation:
DIW Berlin and Hertie School of Governance
Andrew Hughes Hallett
Affiliation:
George Mason University
John Lewis
Affiliation:
De Nederlandsche Bank
*
Address correspondence to: Kerstin Bernoth, Department of Macroeconomics, DIW Berlin, Mohrenstraße 58, 10117 Berlin, Germany; e-mail: kbernoth@diw.de.
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Abstract

This paper develops a new methodology for estimating both the automatic and discretionary components of fiscal policy in one reaction function using the differences between real-time and ex post data. Discretionary policy should respond to information available to the policy maker at the time (real-time data), whereas automatic fiscal policy should respond to the true state of the economy at the time (proxied by the final data). We find that the intended discretionary response of fiscal policy to the cycle is counter-cyclical. Our estimates suggest that the automatic stabilizers are at the lower end of the range found in the related literature. This new methodology reduces the risk present in the conventional CAB approach that part of the discretionary actions may be wrongly attributed to automatic stabilizers. In that sense, automatic stabilizers are typically not as strong as usually claimed. This could be of particular use in countries where insufficient data exist to estimate structural budget sensitivities directly.

Keywords

Fiscal PolicyReal-Time DataDiscretionAutomatic Stabilizers
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 1 , January 2015 , pp. 221 - 243
Copyright
Copyright © Cambridge University Press 2013 

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