The Automatic Stabilization Effect of Fiscal Policy on Business Cycle in Selected OPEC Member Countries

Although there are numerous studies in the literature that look at the theoretical effects of automatic stabilizers and their efficiency, few of them present empirical evidence. This paper conducts an empirical study on the effects of fiscal policy as an automatic stabilizer. In the first part of this paper we attempt to study the cyclicality of fiscal policy and for this purpose, the method of panel data is applied to 8 OPEC member countries for the period of 1976-2009. The results show that the fiscal policy for the selected countries is counter-cyclical. The main purpose of this paper is to study the relationship between fiscal policy (measured by government expenditures, tax revenues and transfers) and fluctuations of economy during business cycles (measured by GDP, private GDP and consumption) among 8 OPEC member countries by applying panel data approach for the period 1976-2005. The results show that there is a strong and negative correlation between tax revenues (relative to GDP) and fluctuations of output. This paper also show that government expenditures (relative to GDP) are positively correlated with the fluctuations of output. The results indicate that tax revenues, as an efficient fiscal policy tool, help to smooth the fluctuations of output. On the other hand, the results show that government expenditures increase the fluctuations of output. Furthermore, we check for the robustness of our results by introducing a list of control variables (openness, GDP, GDP per capita and GDP growth) and introducing these variables into our model does not affect our main results. So, this observation supports the idea that in countries that are exposed to business cycles with more fluctuations, it is desirable to increase tax revenues (relative to GDP) by expanding tax base to help smooth these fluctuations.