This paper tests the cyclicality of fiscal policy in Israel. We find that government deficits are mildly counter-cyclical, mainly in recessions. Expenditures, and in particular, public investment, are pro-cyclical. However, we find that both the government deficit and expenditures have become more countercyclical after 1985, a period that is characterized by improved fiscal discipline, following the Israeli Stabilization. We interpret this result as an indication that Israel is nowadays in a transition from pro-cyclical fiscal policy, as in many developing countries, to countercyclical fiscal policy, as is more common in developed countries.

Keywords: Business Cycles, Fiscal Policy, Israel.
Correspondence: Michel Strawzcynski
Research Department, Bank of Israel.

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