A new look into fiscal countercyclicality: expectations, shocks, and the business cycle

We provide a positive analysis of fiscal stabilizers by focusing on a heterogeneous sample of 84 countries between 1980 and 2015. We add to the literature by: (i) assessing fiscal cyclicality across business cycles’ turning points; (ii) allowing for expectations to play a role; (iii) differentiating the effects stemming from demand and supply shocks. We find that fiscal countercyclicality is sizable across the world, particularly during recessions. Allowing for future expectations about fiscal dynamics enhances the degree of fiscal countercyclicality. Automatic stabilizers are an important component of fiscal stabilization. The fiscal response to demand shocks is higher than to supply shocks.