TAILIEUCHUNG - Debt and other determinants of fiscal policy use

Using a measure of variation in real government expenditure for the period 1998 through 2008, this paper employs cross country regression analysis to look at the effect of public debt, both singularly and when adjusting for control variables, on fiscal policy usage. The empirical findings are consistent with the hypothesis that higher public debt tends to lessen the use of fiscal policy. | Journal of Applied Finance Banking 2011 113-123 ISSN 1792-6580 print version 1792-6599 online International Scientific Press 2011 Debt and other determinants of fiscal policy use William DiPietro1 Abstract Using a measure of variation in real government expenditure for the period 1998 through 2008 this paper employs cross country regression analysis to look at the effect of public debt both singularly and when adjusting for control variables on fiscal policy usage. The empirical findings are consistent with the hypothesis that higher public debt tends to lessen the use of fiscal policy. JEL classification numbers E62 023 Keywords Fiscal Policy Debt Public Trust Development 1 Introduction One of the key potential factors determining how much fiscal policy can be employed is the extent of public debt. Presumably higher levels of public debt make it more difficult both politically and financially to use fiscal policy. Even in the prosperous . debt seems to be making government demand management with the intended aim of coming to the aid of a distressed economy a difficult if 1 Daemen College 4380 Main St. Amherst NY 14226 email wdipietr@ Article Info Revised October 21 2011. Published online November 30 2011 114 Debt and other determinants of fiscal policy use not a very difficult undertaking. The purpose of this paper is to use cross section regression analysis to see whether there is empirical support for the contention that greater debt leads to reduced fiscal policy use. While there is a long history both theoretical and empirical of quantifying fiscal policy multipliers of investigating the results and consequences of fiscal policy of assessing whether monetary or fiscal policy is more effective this paper looks at something a little different. With a focus on public debt as a crucial determinant it explores the determinants of fiscal policy usage. The paper is divided into five sections. The first section provides a brief review of some .

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