Cyclicality of Fiscal Policy in Israel

Abstract

This paper tests the cyclicality of fiscal policy in Israel. We find that government deficits are mildly counter-cyclical, mainly in recessions. Expenditures, and in particular, public investment, are pro-cyclical. However, we find that both the government deficit and expenditures have become more counter-cyclical after 1985, a period that is characterized by improved fiscal discipline, following the Economic Stabilization Program. We interpret this result as an indication that Israel is nowadays in a transition from pro-cyclical fiscal policy, as in many developing countries, to counter-cyclical fiscal policy, as is more common in developed countries.