Do Spanish fiscal regimes follow the euro-area trends? Evidence from Markov-Switching fiscal rules

Abstract

As has been the case for Spain, the Great Recession has exposed the destabilizing potential of national fiscal decisions which do not adhere to the European rules for the euro area. In this context, we characterize the discretionary behavior of Spanish fiscal policymakers in comparison with the euro-area one. For this purpose, we estimate cyclically-adjusted fiscal policy rules for the period 1986–2012 within a Markov-Switching framework. Our results show that the discretionary fiscal behavior of Spanish and euro-area governments has manifested switching properties throughout the last thirty years, uncovering the existence of two fiscal regimes which shift in accordance with the extent of deficit persistence and the intensity of debt-stabilizing and output-countercyclical measures. Irrespective of fiscal regime, the Spanish authorities have committed to meeting the Maastricht criteria and the SGP rules by centering on the public deficit-debt association, whereas the euro-area administrations have engaged in stimulating the economic activity by focusing on the deficit-output gap relation. Our conclusions are robust to the impact of house price changes on fiscal policy variables for the Spanish case.