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Fiscal Adjustment and Business Cycle Synchronization

Discussion Papers 1339, 22 S.

Luca Agnello, Guglielmo Maria Caporale, Ricardo M. Sousa


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Using a panel of annual data for 20 countries we show that synchronized fiscal consolidation (stimulus) programmes in different countries make their business cycles more closely linked, especially in the case of fiscal adjustments lasting 2 or 3 years. We also find: (i) little 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.

JEL-Classification: C41;E62
Keywords: Fiscal consolidation, fiscal stimulus, business cycle synchronization
Frei zugängliche Version: (econstor)