HOW DO FISCAL CONSOLIDATION AND FISCAL STIMULI IMPACT ON THE SYNCHRONIZATION OF BUSINESS CYCLES?. (24th October 2016)

• Record Type: Journal Article
• Authors: Agnello, Luca; Caporale, Guglielmo Maria; Sousa, Ricardo M.
• Is Part Of: Bulletin of economic research. Volume 69:Number 4(2017:Oct.)
• Page Start: 309
• Page End: 329
• Publication Date: 2016-10-24
• Subjects: fiscal consolidation -- fiscal stimulus -- business cycle synchronization -- C41 -- E62; Economics -- Periodicals; Great Britain -- Economic conditions -- Periodicals; 330.05
• DOI: 10.1111/boer.12101
• Languages: English
• ISSNs: 0307-3378

Abstract

ABSTRACT: Using quarterly data for a panel of advanced economies, we show that synchronized fiscal consolidation (stimulus) programmes in different countries make their business cycles more closely linked. We also find: (i) some evidence of decoupling when an inflation targeting regime is unilaterally adopted; (ii) an increase in business cycle synchronization when countries fix their exchange rates and become members of a monetary union; (iii) a positive effect of bilateral trade on the synchronization of business cycles. Global factors, such as a rise in global risk aversion and uncertainty and a reversal of nonstandard expansionary monetary policy, can also reduce the degree of co‐movement of business cycles across countries. From a policy perspective, our work shows that an inflation targeting regime coupled with simultaneous fiscal consolidations can lead to more business cycle synchronization.