Cyclical Budgetary Policy and Economic Growth: What Do We Learn From OECD Panel Data?

Abstract

This paper uses yearly panel data on OECD countries to analyze the relationship between growth and the cyclicality of government debt. We develop new time-varying estimates of the cyclicality of public debt. Our main findings can be summarized as follows: (i) less procyclical public debt growth can have significantly positive effects on productivity growth, in particular when financial development is lower; (ii) public debt growth has become increasingly countercyclical in most OECD countries over the past twenty years, but this trend has been less pronounced in the EMU; (iii) less financially developed or more open economies display less countercyclical public debt growth.