TY  - JOUR
AU  - Battaglini, Marco
AU  - Coate, Stephen
TI  - Fiscal Policy over the Real Business Cycle: A Positive Theory
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14047
PY  - 2008
Y2  - May 2008
DO  - 10.3386/w14047
UR  - http://www.nber.org/papers/w14047
L1  - http://www.nber.org/papers/w14047.pdf
N1  - Author contact info:
Marco Battaglini
Department of Economics
Uris Hall
Cornell University
Ithaca, NY 14850
Tel: 607-255-3052
E-Mail: battaglini@cornell.edu

Stephen Coate
Department of Economics
Cornell University
Uris Hall
Ithaca, NY 14853-7601
Tel: 607/255-1912
Fax: 215/573-2057
E-Mail: sc163@cornell.edu
AB  - This paper presents a political economy theory of the behavior of fiscal policy over the business cycle. The theory predicts that, in both booms and recessions, fiscal policies are set so that the marginal cost of public funds obeys a submartingale. In the short run, fiscal policy can be pro-cyclical with government debt spiking up upon entering a boom. However, in the long run, fiscal policy is counter-cyclical with debt increasing in recessions and decreasing in booms. Government spending increases in booms and decreases during recessions, while tax rates decrease during booms and increase in recessions. Data on tax rates from the G7 countries supports the submartingale prediction, and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the U.S. and other countries.
ER  -