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7.5.2013
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Fiscal Policy and Regional Output Volatility: Evidence from Russia

Markus Eller
Oesterreichische Nationalbank

Jarko Fidrmuc
Zeppelin University Friedrichshafen, OEI Regensburg
Comenius University Bratislava

Zuzana Fungáčová
Bank of Finland

Abstract
This paper investigates the relationship between fiscal policy and output volatility in Russian regions between 2000 and 2009. System GMM estimation techniques are applied to account for potential endogeneity between output volatility and fiscal developments. Our main finding is that fiscal activism, approximated by various measures of discretionary fiscal policy, increases output volatility and thus induces macroeconomic instability. This result corroborates previous studies using cross-country data. To minimize business cycle fluctuations, it would be necessary to curtail fiscal activism at the regional level, e.g. by appropriate fiscal rules and sound fiscal federalism institutions.

JEL Codes: E32, E62, R11. 
Keywords: business cycles, output volatility, automatic stabilizers, discretionary fiscal policy, dynamic panel models



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