Government spending cyclicality, economic stability and uncertainty

Using a dataset of 162 countries over the period 2000-2022, we obtain estimates of the cyclicality of government spending. Based on these, we examine the effect of government spending cyclicality on output growth volatility, economic uncertainty, and the cyclical component of real GDP. We find that real spending is counter-cyclical, primarily in advanced economies, while it is a-cyclical in emerging market economies and procyclical in developing economies. Furthermore, our results, which account for potential endogeneity and reverse causality, indicate that increased public spending cyclicality raises the volatility of output growth and increases economic uncertainty. Consequently, an increase in public spending cyclicality has a negative effect on the cyclical component of real GDP over the medium term. • We estimate time-varying public spending cyclicality for a panel of 162 countries • Increased public spending cyclicality raises the volatility of output growth • Higher public spending cyclicality increases uncertainty • Increased public spending cyclicality lowers the cyclical component of real GDP