Sensitivity of fiscal-policy effects to policy coordination and business cycle conditions

Diverse groups are a hotbed for free riders. This chapter thus tests whether fiscal policy coordination was marred by collective action failure. The central claim of this chapter is that accusations of stability or growth free riding are not borne out by factual evidence. Using regression analysis and Qualitative Comparative Analysis, the chapter shows that despite their greater ability to free ride (given their political clout and trade links), larger and more open economies implemented larger stimulus programs. Fiscal policy is further analyzed vis-à-vis a country’s fiscal space. Results show that, by and large, member states stimulated their economies in line with their fiscal room for maneuver. These findings are contrasted with the political discourse of the time, when indictments of growth free riding were widespread. Accusations of beggar-thy-neighbor politics were rife; first-order free riding was not.

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The Impact of Fiscal Policy on Economic Activity over the Business Cycle: An Empirical Investigation in the Case of Algeria

Review of Middle East Economics and Finance ◽

10.1515/rmeef-2016-0014 ◽

2019 ◽

Vol 15 (3) ◽

Author(s):

Abderrahim Chibi ◽

Sidi Mohamed Chekouri ◽

Mohamed Benbouziane

Keyword(s):

Fiscal Policy ◽

Business Cycle ◽

Government Spending ◽

Economic Recession ◽

Policy Decision ◽

Vector Autoregressive ◽

Asymmetric Effects ◽

The Business Cycle ◽

The Right ◽

The Impact

Abstract In this paper, we aim to analyze whether the effect of fiscal policy on economic growth in Algeria differs throughout the business cycle. To tackle this question, we use a Markov Switching Vector Autoregressive (MSVAR) framework. We find evidence of asymmetric effects of fiscal policy through regimes, defined by the state of the business cycle (recession and boom). The results show small positive government spending and revenue multipliers in the short term in both regimes. Most importantly, fiscal policy shocks have a stronger impact in times of economic recession than in times of expansion, which confirm the hypothesis of asymmetric effects. However, the impact of government spending is stronger than the impact of public revenue during recession periods. In addition, fiscal policy decision-makers interact with Anti-Keynesian view (pro-cyclical). Our results imply that there is something to gain by using the "right instrument" at the "right time".

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