Moreover, they show that overall elasticities (including the discretionary actions) are
asymmetric with respect to upturns and downturns.
Tujula and Wolswijk (2004) show that fiscal policies have not operated symmetrically
over the business cycle as governments have been more prone to stimulate economies in
downswings via expanding budgets than to restrict economic growth in upswings via
tightening budget balances.
In contrast to the above mentioned studies, Mélitz (2000) highlights that fiscal policy
responds in a stabilising manner to the cycle; the automatic stabilisation through fiscal
policy is, however, much weaker than generally perceived.52 Moreover, while expansion
raises tax receipts, it also raises government expenditures. Net stabilisation therefore only
occurs because of a larger reaction of taxes than expenditures. His findings are in
principle in line with Wyplosz (1999), who also shows the “same mildness” of the
stabilising response to the cycle. According to Wyplosz’s estimates an extra percent of
output above potential raises the primary budget surplus by 0.18 (Mélitz’s estimate, in
contrast, amounts to about 0.10). This actually means weak automatic stabilisation in
contrast to what is usually estimated (see van den Noord (2000), Girouard and André
(2005)). Lane (2003) finds that current government spending tends to be mildly counter-
cyclical; however, the government consumption component of current spending, in
particular wage government spending, is pro-cyclical. Hence, he concludes that the
counter-cyclical behaviour of current government spending emanates from the behaviour
of government transfers (automatic stabilisers) and/or debt interest payments. The most
pro-cyclical component of government spending is government investment.53 Hercowitz
and Strawczynski (2004) - similar to Lane (2003) - find the deficit/GDP ratio to be
counter-cyclical. According to their finding, this is mostly due to recessions whereas in
expansions, the deficit/GDP ratio is essentially a-cyclical.
In checking for the cycle dependency of cyclically adjusted figures of the European
Commission (EC), Alberola et al. (2003) by means of a panel estimate conclude that the
cyclical component seems to be overestimated, which means that the cyclically adjusted
balances tend to be overestimated during downturns and underestimated during
expansions. According to their findings, the overall impact seems, however, to be
counter-cyclical in general. In their opinion this result might signal a problem with the
computation of elasticities, which turn out to be too high; at the same time, the results
could capture a systematic discretionary reaction of governments to developments in
economic activity. But, as they state, it does not appear to be easy to disentangle the two
possibilities from each other.
The approaches taken for investigating the cyclical-related impact of fiscal policies (from
built-in stabilisers as well as from deliberate policy decision) are quite heterogenous.
Some studies analyse overall changes in the budget balance (primary or total), without
distinguishing between discretionary actions and automatic stabilisers (e.g. Mélitz (2000),
Balassone and Francese (2004), Tujula and Wolswijk (2004), Lane (2003), Mayes and
Virén (2004), Fatas and Mihov (2001)) whereas others analyse changes in the cyclically
52
53
According to Wyplosz (2002) this mildly stabilizing response (coefficients of 0.1-0.2 instead of
around 0.5) could be an effect of the extension of the sample period to include the 1990s, an atypical
period of low growth and closing down of the deficit to meet the Maastricht convergence criteria. It
may also reflect the combination of the counter-cyclical automatic stabilizers, with an elasticity of
0.5, with discretionary pro-cyclical actions.
Also Alberola et al. (2003) confirm this result.
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