Abstract
This paper studies the role of business cycles in the phenomenon of
increasing government spending/GDP ratios in the OECD countries. An empirical
framework that includes both long-run and cyclical considerations in the
determination of government spending is applied to panel data covering the
1975-1988 period. The main finding is that the prolonged rise in the government
spending/GDP ratio is partially explained by cyclical ratcheting: the spending/GDP
ratio increases during recessions and is only partially reduced in expansions. The
long-run ratcheting effect is estimated as approximately 2 percent of GDP. Also
analyzed are the cyclical changes in the composition of government spending (goods
and services, transfers and subsidies, and capital expenditure), as well as possible
link between cyclical ratcheting and government weakness.