Fiscal space and government-spending cyclicality: Disparity between the procyclical and the countercyclical

Abstract

Abstract This study employs quantile regression analysis on a dataset encompassing 160 countries spanning the period from 1990 to 2020. Its primary objective is to investigate the relationship between fiscal space and various conditional quantiles of government-spending cyclicality. Unlike prior literature, which predominantly centers on government debt sustainability, our study introduces a comprehensive perspective on fiscal space, encompassing dimensions that have received comparatively limited attention. These dimensions include sovereign balance sheet vulnerability, contingent liabilities arising from risks associated with external and private sector debt, and market perceptions of sovereign risk. Our analysis suggests that fiscal space is statistically significant only at the upper part of the conditional government-spending cyclicality distribution, i.e., fiscally procyclical countries. We also find that, in fiscally procyclical countries, the share of foreign currency debt in total government debt, the share of government debt held by nonresidents in total government debt, the share of short-term external debt in total external debt, the ratio of government debt to tax revenue, natural resource dependence, and inflation rate are associated with higher government-spending procyclicality. In contrast, factors such as sovereign debt rating, financial depth, and the share of short-term debt in total external debt are associated with lower government-spending cyclicality. JEC codes: H30, H60, H63