Empirical evidence to date suggests a positive relationship between fiscal policy countercyclicality and growth. But do all industries gain equally from countercyclical fiscal policy? What are the channels through which countercyclical fiscal policy affects industry-level growth? We answer these questions by applying a difference-in-difference approach to an unbalanced panel of 22 manufacturing industries for 55 countries-including both advanced and developing economies-during the period 1970-2014. Among the various industry characteristics guided by different theoretical channels, we find that the credit constraints channel identifies the best transmission mechanism through which countercyclical fiscal policy enhances growth. This channel becomes stronger during periods of weak economic activity when credit constraints are more likely to bind and periods of effective lower bound on the monetary policy rate.
|Number of pages||32|
|Journal||Oxford Economic Papers|
|Publication status||Published - 2022 Jul 1|
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All Science Journal Classification (ASJC) codes
- Economics and Econometrics