IS IT A FAKE BOOM? PRO-CYCLICAL FISCAL POLICY AND ECONOMIC GROWTH

Promoting economic growth is one of the main objectives of the government’s expansionary fiscal policy. However, pro-cyclical policies in response to cyclical shocks to the economy may exacerbate economic downturns if policies fail to achieve the desired growth rate. Based on the mixed panel data of 72 emerging and advanced economies from 1993 to 2022, this paper empirically studies the impact mechanism of fiscal policy and its cyclicalness on economic growth and its nonlinear relationship. The main results show that government spending can significantly promote economic growth when the economy is stable (no cyclical fluctuations). For every unit increase in the government’s pro-cyclical fiscal policy, the overall size of the economy will increase by 0.09%, and the economic growth rate will also increase by 0.8%. However, if the economy falls into a recession cycle, the positive promotion effect of pro-cyclical fiscal policy on economic growth will gradually disappear, and may turn into an inhibitory effect. Through heterogeneity analysis, we find that the effect of pro-cyclical fiscal policy on economic growth may be more obvious in developed countries, and the degree of external debt dependence is an important factor that hinders the positive effect of pro-cyclical fiscal policy on economic growth. This paper provides new empirical evidence for understanding the direction of the cyclical choice of fiscal policy, and has certain policy implications for the establishment of a modern fiscal system.