The Effects of Government Spending Over the Business Cycle: A Disaggregated Analysis for OECD and Non-OECD Countries

PurposeThis study examines the asymmetric effect of government spending on economic growth in Nigeria over the period 1980–2017. Specifically, this study investigates whether the response of economic growth to government spending shocks differs according to the nature of shocks on them. In addition, the authors examine whether the stabilizing effects of fiscal policies are dependent on the state of the business cycle.Design/methodology/approachThe study adopts the linear fiscal reaction function in addition to the nonlinear regression model of Hatemi-J (2011, 2012), Granger and Yoon (2002), which allows us to separate negative shocks from positive shocks to government spending. Similarly, the authors adopt the generalized method of moments (GMM) techniques of Hansen (1982) to account for simultaneity and endogeneity problems inherent in dynamic model.FindingsThe authors’ findings reveal that there is evidence of asymmetry in the government spending–economic growth nexus in Nigeria over the period of study. Specifically, the authors find that the response of economic growth to government spending shocks differs according to the nature of shocks on them. More specifically, the study established that the stabilizing effects of fiscal policies are dependent on the state of the business cycle.Originality/valueUnlike the traditional method of modeling asymmetry, which adopts the simple inclusion of a squared government spending term or by the inclusion of a cubic government spending term, the model adopted in this study allows us to model shocks and show how the responses of economic growth to government expenditure differ according to the nature of shocks on them.

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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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THE OUTPUT AND WELFARE EFFECTS OF GOVERNMENT SPENDING SHOCKS OVER THE BUSINESS CYCLE

International Economic Review ◽

10.1111/iere.12308 ◽

2018 ◽

Vol 59 (3) ◽

pp. 1403-1435 ◽

Cited By ~ 13

Author(s):

Eric Sims ◽

Jonathan Wolff

Keyword(s):

Business Cycle ◽

Government Spending ◽

Welfare Effects ◽

Spending Shocks ◽

The Business Cycle

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Leading Indicators of the Business Cycle: Dynamic Logit Models for OECD Countries and Russia

SSRN Electronic Journal ◽

10.2139/ssrn.2600847 ◽

2015 ◽

Cited By ~ 1

Author(s):

Anna Pestova

Keyword(s):

Business Cycle ◽

Oecd Countries ◽

Leading Indicators ◽

Logit Models ◽

The Business Cycle

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Fiscal Multipliers and Their Relevance in a Currency Union – A Survey

German Economic Review ◽

10.1111/geer.12020 ◽

2014 ◽

Vol 15 (2) ◽

pp. 259-271 ◽

Cited By ~ 6

Author(s):

Gerhard Illing ◽

Sebastian Watzka

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Business Cycle ◽

Government Spending ◽

Currency Union ◽

Euro Crisis ◽

Fiscal Multipliers ◽

Role Of The State ◽

The Business Cycle

Abstract The article reviews the debate on government spending multiplier and provides a detailed discussion of the underlying economic mechanisms, focusing on the role of the state of the business cycle and the monetary policy reaction. Special emphasis is on the effects of fiscal policy within a currency union and its implications for the euro crisis.

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How Is Tax Policy Conducted Over the Business Cycle?

American Economic Journal Economic Policy ◽

10.1257/pol.20120218 ◽

2015 ◽

Vol 7 (3) ◽

pp. 327-370 ◽

Cited By ~ 19

Author(s):

Carlos A. Vegh ◽

Guillermo Vuletin

Keyword(s):

Business Cycle ◽

Government Spending ◽

Tax Policy ◽

Developing Economies ◽

Value Added ◽

Tax Rates ◽

Industrial Countries ◽

Cyclical Behavior ◽

The Business Cycle ◽

Shed Light

It is well known by now that government spending has typically been procyclical in developing economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and, hence, cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960–2013 that comprises corporate income, personal income, and value-added tax rates. We find that tax policy is acyclical in industrial countries but mostly procyclical in developing countries. (JEL E32, E64, H24, H25, O11, O23)

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Measuring How Fiscal Shocks Affect Durable Spending in Recessions and Expansions

The American Economic Review ◽

10.1257/aer.104.5.112 ◽

2014 ◽

Vol 104 (5) ◽

pp. 112-115 ◽

Cited By ~ 21

Author(s):

David Berger ◽

Joseph Vavra

Keyword(s):

Business Cycle ◽

Strong Evidence ◽

Government Spending ◽

Cost Model ◽

The State ◽

Fixed Cost ◽

State Of The Economy ◽

Theoretical Predictions ◽

The Business Cycle ◽

Fiscal Shocks

We estimate how durable expenditures respond to government spending shocks at different points in the business cycle using a nonlinear VAR approach that allows for the durable multiplier to vary smoothly with the state of the economy. We find strong evidence that the aggregate durable spending response to fiscal shocks is substantially larger during expansions than during recessions, in contrast to what has been has been observed for the aggregate multiplier. We argue that these results are consistent with the theoretical predictions of the fixed cost model of durable demand in Berger and Vavra (2012).

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