Recognizing the Bias: Financial Cycles and Fiscal Policy

By Nina Budina, Borja Gracia, Xingwei Hu, Sergejs Saksonovs

November 24, 2015

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Format: Chicago

Nina Budina, Borja Gracia, Xingwei Hu, and Sergejs Saksonovs. Recognizing the Bias: Financial Cycles and Fiscal Policy, (USA: International Monetary Fund, 2015) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

Subject: Debt bias, Financial cycles, Financial sector policy and analysis, Fiscal policy, Housing prices, Prices, Private debt, Public debt, Tax policy

Keywords: Bias estimate, Cycle episode, Cycles result in a public sector debt bias, Debt, Debt bias, Financial cycles, Global, Growth episode, Growth shock, House price cycle episode, House price cycles result in a public sector debt bias, House price episode, House-price shock, Housing cycles, Housing prices, Output gap downturn, Price, Private debt, Public debt, State dummy, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/246
Stock No:

WPIEA2015246
ISBN:

9781513508863
ISSN:

1018-5941

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