On the cyclicality of Irish fiscal policy

Abstract

In this paper, we tackle the important issue of cyclicality in the behaviour of Irish fiscal policy. We first review arguments in favour of the optimality of countercyclical fiscal policy. Next we outline a political economy model that explains procyclical fiscal policy as the rational, albeit suboptimal, outcome of an allocation game among competing fiscal groups. In our empirical work, we find the evidence generally rejects countercyclicality in Irish fiscal policy. We conclude by briefly discussing some institutional reforms that may improve the operation of fiscal policy over the economic cycle.