Fiscal cyclicality asymmetries and public debt: New evidence from panel endogenous threshold model

The purpose of this paper is to verify the role of public debt in the fiscal cyclical response for a sample of 19 OECD countries over the period 1980-2017 using the threshold model proposed by Seo and Shine (2016). We reveal first that throughout the
cycle the crossing of a threshold estimated at 85% leads to a shift from neutrality to procyclicality, then an asymmetric relationship: during the recession phase the fiscal cyclicality is neutral independently of the value of the debt ratio, but during the expansion phase the exceeding of a threshold estimated at 81% leads to a shift from neutrality to procyclicality. This last result shows that debt is a crucial factor that hinders the build-up of reserves during good times.