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Fiscal Space and Government-Spending Cyclicality: Evidence from Quantile Regression

This study applies quantile regression to a sample of 160 countries over the period 1990-2020 to explore the relationship between fiscal space and different conditional quantiles of government-spending cyclicality.  Moreover, as fiscal space is a multidimensional concept, unlike the literature, which focuses on government debt sustainability, we consider additional dimensions of fiscal space that have received less attention – sovereign balance sheet vulnerability, contingent liabilities arising from the risks of external and private sector debt, and market perception of sovereign risk.  Our analysis suggests that fiscal space is statistically significant only at the upper part of the conditional government-spending cyclicality distribution, i.e., fiscally procyclical countries.  We also find that for fiscally procyclical countries, the share of foreign currency debt in total government debt, the share of government debt held by nonresidents in total government debt, the share of short-term external debt in total external debt, the ratio of government debt to tax revenue, natural resource dependence, inflation have a procyclical effect, whereas sovereign debt rating, financial depth, and the share of short-term debt in total external debt have a countercyclical effect.