Cyclical Ratcheting in Government Sp ending: Evidence from the OECD

05/09/2001 |  Strawczynski Michel, Hercowitz Zvi
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Fiscal Policy

Cyclical Ratcheting in Government Spending: Evidence from the OECD
Z. Hercowitz and M. Strawczynski


This paper studies the role of business cycles in the phenomenon of 
increasing government spending/GDP ratios in the OECD countries.  An empirical 
framework that includes both long-run and cyclical considerations in the 
determination of government spending is applied to panel data covering the 
1975-1988 period.  The main finding is that the prolonged rise in the government 
spending/GDP ratio is partially explained by cyclical ratcheting: the spending/GDP 
ratio increases during recessions and is only partially reduced in expansions.  The 
long-run ratcheting effect is estimated as approximately 2 percent of GDP.  Also 
analyzed are the cyclical changes in the composition of government spending (goods 
and services, transfers and subsidies, and capital expenditure), as well as possible 
link between cyclical ratcheting and government weakness.

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