Cyclicality of Fiscal Policy in Israel

This paper tests the cyclicality of fiscal policy in Israel. We find that deficits are mildly countercyclical, mainly in recessions. Expenditures, and in particular public investment, are procyclical. However, we find that both government deficit and expenditures have become more countercyclical after 1985, a period that is characterized by improved fiscal discipline, following the Stabilization Program. We interpret this result as evidence that Israel is nowadays in a transition from procyclical fiscal policy, as in many developing countries, to a countercyclical fiscal policy, as is more common in developed countries