Discretionary fiscal policy and recessions

Abstract

In this chapter we propose a new measure of discretionary public expenditures. We distinguish discretionary from non-discretionary spending by evaluating the persistence and volatility of expenditure components. Clearly, discretionary expenditures should be less persistent and more volatile than mandatory spending. By using this metric, we show that only about one third of total expenditure is ready to be used for the purposes of counter-cyclical discretionary fiscal policy in OECD countries. We also point to the puzzling fact that there has been little use of discretionary expenditures to counteract the Great Recession,especially in Europe.