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Fiscal policy as a stabilizer of business cycle
fluctuations: Real Business Cycle model and OECD
empirical evidence over 1970–2005
Abstract
This paper deals with the interaction between fiscal policy and the business
cycle. It mainly focuses on the interaction between this policy and output fluctuations
observed across OECD countries over the past thirty five years.
The Hodrick-Prescott filter was employed to fit a long-term trend in GDP to
the raw data, and to derive the short-term cycles of each series.
We achieved the following conclusion: the size of the government as measured
by expenditures and taxes as a percentage of GDP is clearly inversely related
to the volatility of GDP. Our results are not consistent with the RBC theory.