Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?

Abstract

This chapter analyzes the relationship between growth and the cyclicality of the budget deficit using yearly panel data on OECD countries. It shows that the budget deficit has become increasingly countercyclical in most OECD countries over the past twenty years, but this trend has been significantly less pronounced in the European Monetary Union (EMU). Within countries, a more countercyclical budgetary policy is positively associated with a higher level of financial development, a lower level of openness, and the adoption of an inflation targeting regime. A more countercyclical budgetary policy has a greater positive impact on growth when financial development is lower.

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