Working Paper Series no. 354: Fiscal Policy Discretion, Private Spending, and Crisis Episodes

Abstract

In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for– in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run – especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability.

Luca Agnello, Davide Furceri and Ricardo M. Sousa
December 2011

Classification JEL : E0, E6

Keywords : Fiscal policy discretion, GDP growth, private consumption, private investment, crowding-in, crowding-out.