HOW DO FISCAL CONSOLIDATION AND FISCAL STIMULI IMPACT ON THE SYNCHRONIZATION OF BUSINESS CYCLES? |
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Authors: | Luca Agnello Guglielmo Maria Caporale Ricardo M Sousa |
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Affiliation: | 1. University of Palermo, Palermo, Italy;2. Department of Economics and Finance, Brunel University, London, UK;3. London School of Economics and Political Science, London, UK |
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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. |
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Keywords: | fiscal consolidation fiscal stimulus business cycle synchronization C41 E62 |
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