Cyclicality meets rigidities
Date
2024-10
Authors
Ruiz Orrico, Pilar
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Vuletin, Guillermo
Tommasi, Mariano
Journal Title
Journal ISSN
Volume Title
Publisher
Universidad de San Andrés. Departamento de Economía
Abstract
Economic academia often warns against the dangers of procyclicality in public spending. However, the realization of these risks depends on asymmetries in the degree of cyclicality throughout the business cycle. Governments incur deficits only if they fail to reduce spending during downturns as much as they increase it during preceding booms. This study explores these asymmetries in the context of goods and services and compensation to employees, the components of public consumption, for a large panel of advanced and emerging economies. We conduct our empirical analysis using panel regressions, and validate our results with a trade-weighted growth instrumental variable, focusing on identifying associations rather than establishing causal relationships. In advanced economies, output growth is associated to a small positive effect on public consumption. In contrast, in emerging economies, output growth is connected to a more than proportional positive effect on goods and services, while becoming acyclical during recessions, exhibiting an overall semi-procyclical behavior. Furthermore, compensation to employees in emerging markets is related to a less than proportional increase during economics expansions, indicating possible rigidities associated with this category. This phenomenon, referred to as "downward rigidity" in public consumption, not only paves the way for fiscal stress during economic downturns but also leads to sustained growth in the size of the state.
Description
Fil: Ruiz Orrico, Pilar. Universidad de San Andrés. Departamento de Economía; Argentina.