Fiscal Policy Cyclicality, Governance, and Quality of Institutions Nexus in Ireland

Purpose: The relationship between income and government consumption expenditure would reflect the nature of any country's fiscal cyclicality. This study aims to pragmatically evaluate the cyclicality of the fiscal dogma in Ireland and test the role of political institutions, economic institutions, and governance on the cyclicality of the fiscal policy in Ireland. Methodology and Approach: The 3-Stage Least Square technique is applied due to possible endogeneity in the model. Findings: Ireland's fiscal dogma is found as countercyclical in the presence of effective political and economic institutions with highly-structured and well-functioning governance. A negative relationship is observed between income per capita and government consumption expenditure. Hence, countercyclical fiscal policy is corroborated. Moreover, the lag of government consumption and the real interest rate reduces the present government consumption. Local and foreign investments, economic growth differences, government revenues, imports, and population growth have positive effects on government consumption expenditures. Based on findings, we recommend that the Irish government strengthen the quality of institution and governance to support the phenomena of its fiscal policy's counter cyclicality for a smooth fiscal policy in the country.