Resumen de Cyclical Asymmetry in State Fiscal Policy: Is It Biased Toward Big or Small Government?

Sunjoo Kwak

• Recent research has shown that fluctuations in revenue availability over the business cycle cause the adoption of fiscal policy that amplifies economic cycles. Building on theoretical models that address the political economy of fiscal expansions and adjustments and the fiscal policy preferences of voters and policymakers, this article examines whether those procyclical effects are symmetric between boom and recession. The analysis reveals that the procyclical effects of cyclical revenue increases (in upturn years) on expenditures are smaller than those of cyclical revenue decreases (in downturn years), whereas the procyclical effects of cyclical revenue increases on tax rates are larger than those of cyclical revenue decreases. That is, policymakers prefer tax cuts to spending increases in pursuing expansionary fiscal policy during booms and spending cuts to tax increases in making fiscal adjustments during recessions. Taken together, the results suggest that cyclical fluctuations in revenue availability have procyclical effects on state fiscal policies in a manner that is asymmetric between boom and recession and fiscally conservative.