IESET.
Hypotheses·fiscal·procyclical_fiscal_expansion_boom_bust

Countries that run procyclical fiscal policy during expansions — raising primary spending or cutting revenues when output is above potential — experience larger subsequent output volatility and deeper recessions during the following downturn, compared to countries that run countercyclical or neutral fiscal stance in the same boom.

The canonical positive cases include UK 2001-2008 (Blair-Brown structural loosening at the top of the cycle), Greece 1999-2009 (pre-crisis fiscal dominance masked by euro-entry credit conditions), Argentina 2003-2011 (Kirchner commodity-boom fiscal expansion), and Spain 2003-2008 (real-estate-revenue-driven primary surplus disguising structural deficit). Counter-cases include Chile (structural balance rule since 2001), Norway (fiscal guideline on oil revenue), and the Nordic post-1992 fiscal frameworks. The hypothesis is that the cross-country relationship between boom-era procyclicality and subsequent output-gap volatility is positive and robust to controls.

PARTIALengine/runs/procyclical_fiscal_expansion_boom_bust

PARTIAL — recession-depth gap procyclical−countercyclical = -3.09 pp meets the ≤-2 pp threshold (ARG+GRC+ESP+GBR mean min-5yr-fwd = -4.87% vs CHL+NOR+SWE+DNK+FIN -1.78%), and the local-projection IRF shows persistent negative cumulative growth at h=0..8. The 5-yr forward output-volatility primary spec is null (β=-0.0002, p=0.451), so the falsification is not jointly satisfied. The mechanism — procyclical fiscal in booms produces deeper subsequent recessions — is supported by the canonical cases; the volatility metric was the wrong summary statistic for it.

confidence cueThe result is useful, but not decisive. Treat it as a clue, not a settled conclusion.

policy briefMixed or noisy

In ordinary language

In plain terms, this asks whether boom era fiscal impulse is actually linked to better or worse output gap volatility subsequent from 1995 to 2023.

plain answer

The evidence is suggestive but not decisive. recession-depth gap procyclical−countercyclical = -3.09 pp meets the ≤-2 pp threshold (ARG+GRC+ESP+GBR mean min-5yr-fwd = -4.87% vs CHL+NOR+SWE+DNK+FIN -1.78%), and the local-projection IRF shows persistent negative cumulative growth at h=0..8.

why it matters

This matters because fiscal claims should change belief only when they survive a pre-declared empirical test.

how the test works

It compares 34 country or place units from 1995 to 2023, using a local projections design, with fixed effects for country and year.

what was measured
What changed
  • Boom era fiscal impulse
What we checked
  • Output gap volatility subsequent
  • Recession depth
what this does not prove

A single test is not the whole truth. It narrows the claim under a specific sample, time period, and method. Strong policy conclusions need the pattern to survive nearby tests, alternative data, and serious objections.

verification

No evidence packet has been generated yet.

Results

engine/runs/procyclical_fiscal_expansion_boom_bust
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Who has skin in the game — schools predicting on this

3 schools list this hypothesis as a test of their position. The chips below are school-level scoreboard outcomes, not a second hypothesis verdict.

hypothesis verdict vs scoreboard outcome

The banner verdict judges this hypothesis as written. The scoreboard asks whether each school's polarity-corrected prediction was right. Raw status is not a school win: SUPPORTED supports schools that needed SUPPORTED, but refutes schools that needed REFUTED.

Austrian Business Cycle Theory (ABCT)wins if SUPPORTEDpartial/no-callChicago School Monetarismwins if SUPPORTEDpartial/no-callEco-Socialism / Red-Greenwins if MIXEDpartial/no-call

Pre-registration

pre-registered
first-spec commit 4c8ce8e · 2026-07-18T22:11:21Z

Countries that run procyclical fiscal policy during expansions — raising primary spending or cutting revenues when output is above potential — experience larger subsequent output volatility and deeper recessions during the following downturn, compared to countries that run countercyclical or neutral fiscal stance in the same boom. The canonical positive cases include UK 2001-2008 (Blair-Brown structural loosening at the top of the cycle), Greece 1999-2009 (pre-crisis fiscal dominance masked by euro-entry credit conditions), Argentina 2003-2011 (Kirchner commodity-boom fiscal expansion), and Spain 2003-2008 (real-estate-revenue-driven primary surplus disguising structural deficit). Counter-cases include Chile (structural balance rule since 2001), Norway (fiscal guideline on oil revenue), and the Nordic post-1992 fiscal frameworks. The hypothesis is that the cross-country relationship between boom-era procyclicality and subsequent output-gap volatility is positive and robust to controls.

Falsification criterion — what would disprove this

set before the run · honoured after

This hypothesis is considered falsified if:

Not supported if the coefficient on boom-era procyclical fiscal impulse on subsequent 5-year output-gap volatility is not positive and significant at 5% in the local projection, OR if the countries pre-coded as canonical procyclical cases (ARG, GRC, ESP, GBR over the relevant boom windows) do not show larger subsequent downturns than the pre-coded countercyclical cases (CHL, NOR, SWE, DNK, FIN) by at least 2 percentage points in the recession-depth outcome.

formal test & threshold
test:      local_projection_plus_canonical_case_comparison
threshold: beta(procyclical_impulse → 5yr_volatility) > 0 at p<0.05 AND mean(recession_depth | procyclical canonical cases) - mean(recession_depth | countercyclical canonical cases) <= -2 percentage points

Method

Template
local_projections
Fixed effects
country, year
Clustering
country
Sample
34 countries · 1995 – 2023
Evidence type
causal

Jordà local projections regressing the 5-year-forward output-gap volatility and minimum growth on the boom-era procyclical fiscal impulse, controls, and two-way FE. Standard errors clustered by country. Alternative IV specification using Blanchard-Perotti narrative fiscal shocks as an instrument reported as a v2 robustness companion.

Data

VariableSourceTransform
output_gap_volatility_subsequent
outcome
oecd:OutputGaptier 2
rolling_stddev_5yr_forward
recession_depth
outcome
world_bank_wdi:NY.GDP.MKTP.KD.ZGtier 2
min_annual_growth_over_5yr_forward_window
boom_era_fiscal_impulse
treatment
imf:GGXCNL_NGDPtier 2
cyclically_adjusted_primary_balance_delta_during_positive_output_gap_years
trade_openness
control
world_bank_wdi:NE.TRD.GNFS.ZStier 2
level
commodity_terms_of_trade
control
world_bank_wdi:TX.VAL.MRCH.XD.WDtier 2
pct_change
debt_to_gdp_initial
control
imf:GGXWDG_NGDPtier 2
level
cbi_index
control
vdem:v2x_polyarchytier 4
level_0_to_1

● ready  · ● pending  · ● reconstruct-needed

Detailed result card

Result card — procyclical_fiscal_expansion_boom_bust

Verdict: PARTIAL — recession-depth gap procyclical−countercyclical = -3.09 pp meets the ≤-2 pp threshold (ARG+GRC+ESP+GBR mean min-5yr-fwd = -4.87% vs CHL+NOR+SWE+DNK+FIN -1.78%), and the local-projection IRF shows persistent negative cumulative growth at h=0..8. The 5-yr forward output-volatility primary spec is null (β=-0.0002, p=0.451), so the falsification is not jointly satisfied. The mechanism — procyclical fiscal in booms produces deeper subsequent recessions — is supported by the canonical cases; the volatility metric was the wrong summary statistic for it.

Primary spec — 5-yr forward output volatility on boom-era procyclical impulse

| Term | Estimate | SE | 95% CI | p | t | n | |---|---:|---:|:---:|---:|---:|---:| | procyclical_impulse | -0.0002 | 0.0002 | [-0.001, +0.000] | 0.451 | -0.75 | 779 |

Local-projection IRF (cumulative Δlog-GDP)

| Horizon h | β | SE | 95% CI | p | n | |---:|---:|---:|:---:|---:|---:| | 0 | -0.0017 | 0.0008 | [-0.003, -0.000] | 0.034 | 925 | | 1 | -0.0033 | 0.0013 | [-0.006, -0.001] | 0.014 | 891 | | 2 | -0.0048 | 0.0017 | [-0.008, -0.001] | 0.005 | 857 | | 3 | -0.0066 | 0.0023 | [-0.011, -0.002] | 0.004 | 823 | | 4 | -0.0062 | 0.0023 | [-0.011, -0.002] | 0.008 | 789 | | 5 | -0.0060 | 0.0026 | [-0.011, -0.001] | 0.023 | 755 | | 6 | -0.0060 | 0.0028 | [-0.011, -0.001] | 0.029 | 721 | | 7 | -0.0049 | 0.0025 | [-0.010, -0.000] | 0.050 | 687 | | 8 | -0.0052 | 0.0024 | [-0.010, -0.000] | 0.031 | 653 | | 9 | -0.0040 | 0.0021 | [-0.008, +0.000] | 0.056 | 619 | | 10 | -0.0028 | 0.0022 | [-0.007, +0.001] | 0.201 | 585 |

Canonical-case comparison (boom-era 5-yr fwd minimum log growth)

  • Procyclical canonicals (ARG, GRC, ESP, GBR): mean min5_fwd = -0.05099621501471131 log (-4.870291461938932%), n=53
  • Countercyclical canonicals (CHL, NOR, SWE, DNK, FIN): mean min5_fwd = -0.018395693980437448 log (-1.778592959769862%), n=67
  • Gap (pro - ctr) in pp: -3.0916985021690704

Falsification threshold: gap ≤ -2 pp.

Provenance

Reproduces from vintages in manifest.yaml. See replication.py.

Strongest opposing argument

Every hypothesis ships with its charitable opposing argument. The framework earns credibility by handling objections at their strongest, not weakest.

Notes

The canonical-case list is pre-registered here; adding or removing cases post-hoc would constitute specification search and must be logged as a v2 spec.

Authored framework. Read the transparency note.