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Fiscal counter-cyclicality and productive investment: evidence from advanced economies

  • Davide Furceri and João Tovar Jalles ORCID logo EMAIL logo

Abstract

We use a difference-in-difference approach to 25 industries for 18 advanced economies over the period 1985–2012 to examine the effect of fiscal counter-cyclicality on productive investment: (i) Research and Development (R&D), and (ii) Information and Communications Technology (ICT). The results show that fiscal counter-cyclicality increases R&D expenditure and the share of ICT capital in industries that are more financially constrained. Moreover, the effect is larger during recessions – when financing constraints are more likely to be binding – than during economic expansions. Our statistical method mitigates concerns about omitted variable bias and reverse causality. In addition, the results are robust to different measures of fiscal counter-cyclicality and to the inclusion of several controls.

JEL Classification: E62; H50; H60

Appendix

Table 2:

The effect of fiscal counter-cyclicality: manufacturing versus non-manufacturing.

Explanatory variable(I)(II)(III)(IV)
All sectorsManufacturing
R&DICT-capital shareR&DICT-capital share
Fiscal counter-cyclicality* financial dependence0.914*** (2.90)0.162*** (3.72)1.206*** (4.02)0.173*** (3.72)
Differential effect (%)10.11.813.31.9
Observations4759994439526165
R20.970.770.980.81
  1. Estimates based on equation (4). Country*time and country*sector fixed effects included. T-statistics based on clustered standard errors at the country-industry level are reported in parenthesis. *, **, *** denote significance at 10, 5 and 1 percent, respectively. Differential effect computed for an industry whose external financial dependence would increase from the 25th percentile to the 75th percentile of the financial dependence distribution when fiscal counter-cyclicality would increase from the 25th to the 75th percentile.

Table 3:

The effect of fiscal counter-cyclicality: asset tangibility.

Explanatory variable(I)(II)
R&DICT-capital share
Fiscal counter-cyclicality* asset tangibility−2.754*** (−3.81)−0.558*** (−4.19)
Differential effect (%)−9.2−1.9
Observations45477608
R20.980.79
  1. Estimates based on equation (4). Country*time and country*sector fixed effects included. T-statistics based on clustered standard errors at the country-industry level are reported in parenthesis. *, **, *** denote significance at 10, 5 and 1 percent, respectively. Differential effect computed for an industry asset tangibility would increase from the 25th percentile to the 75th percentile of the asset tangibility distribution when fiscal counter-cyclicality would increase from the 25th to the 75th percentile.

Table 4:

The effect of fiscal counter-cyclicality – WLS.

Explanatory variable(I)(II)
R&DICT-capital share
Fiscal counter-cyclicality*financial dependence1.224*** (2.78)0.138*** (2.57)
Differential effect (%)13.51.5
Observations47599944
R20.970.77
  1. Estimates based on equation (4). Country*time and country*sector fixed effects included. T-statistics based on clustered standard errors at the country-industry level are reported in parenthesis. *, **, *** denote significance at 10, 5 and 1 percent, respectively. Differential effect computed for an industry financial dependence would increase from the 25th percentile to the 75th percentile of the financial dependence distribution when fiscal counter-cyclicality would increase from the 25th to the 75th percentile.

Table 5:

The effect of fiscal counter-cyclicality – alternative measures.

Explanatory variable(I)(II)(I)(II)
R&DICT-capital shareR&DICT-capital share
Fiscal counter-cyclicality (primary balance)* financial dependence0.479*** (3.05)0.029** (2.02)0.029** (2.02)
Fiscal counter-cyclicality (IV)* financial dependence1.118*** (4.20)0.037*** (2.58)
Differential effect (%)5.50.315.30.5
Observations2960672734805230
R20.970.810.970.78
  1. Estimates based on equation (4). Country*time and country*sector fixed effects included. T-statistics based on clustered standard errors at the country-industry level are reported in parenthesis. *, **, *** denote significance at 10, 5 and 1 percent, respectively. Differential effect computed for an industry asset tangibility would increase from the 25th percentile to the 75th percentile of the financial dependence distribution when fiscal counter-cyclicality would increase from the 25th to the 75th percentile.

Table 10:

Average fiscal counter-cyclicality.

CountryFiscal Counter-cyclicality
Australia0.21
Austria0.06
Belgium0.33
Canada0.32
Denmark0.24
Finland0.22
France0.31
Greece0.29
Ireland0.38
Italy0.25
Japan0.18
Korea0.16
The Netherlands0.44
Norway0.74
Portugal0.20
Sweden0.14
UK0.19
US0.23
Table 11:

The effect of fiscal counter-cyclicality on ICT and non-ICT capital (percent).

Explanatory variable(I)(II)
ICT-capitalNon-ICT capital
Fiscal counter-cyclicality* financial dependence0.599** (2.86)0.241** (2.10)
Observations99619963
R20.950.85
  1. Estimates based on equation (5). Country*time and country*sector fixed effects included. T-statistics based on clustered standard errors at the country-industry level are reported in parenthesis. *, **, *** denote significance at 10, 5 and 1 percent, respectively. Differential effect computed for an industry whose external financial dependence would increase from the 25th percentile to the 75th percentile of the financial dependence distribution when fiscal counter-cyclicality would increase from the 25th to the 75th percentile.

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Article note

The usual disclaimer applies. The views expressed are those of the authors and do not necessarily represent those of the IMF or its policy.


Published Online: 2018-09-28

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