The trade effects of counter-cyclical fiscal policies

•We consider the influence of counter-cyclical fiscal policy on industrial exports.•Counter-cyclical policy is beneficial to the exports of sectors that rely more on external funds.•The estimated export gains range from 9.8% to 13.5% for the results of OLS.•The estimated export gains lie between 25.7% and 39.3% based on the results of IV.•The key finding survives a variety of robustness checks.

This article assesses the causal effect of a counter-cyclical fiscal policy on industrial exports. By utilizing Rajan and Zingales's (1998) difference-in-difference methodology on a large panel of cross-country, cross-industry data over the period 1989-2004, we show that industries with higher dependence on external finance tend to export more in countries that implement fiscal policies that are more counter-cyclical. More specifically, the results of the OLS (IV) estimation indicate that there exists a difference in the gains in terms of the export share lying in a range from 9.8% to 13.5% (25.7% to 39.3%) between the industry at the 75th percentile and the 25th percentile of external finance in a country with a degree of fiscal counter-cyclicality at the 75th percentile compared with a country at the 25th percentile. Moreover, the key finding survives a variety of robustness checks.