Has Fiscal Discretion during Good Times and Bad Times Changed in the Euro Area Countries?

Abstract

We study the relationship between the change in the cyclically-adjusted primary balance (an indicator of discretionary fiscal policy) and the change in the output gap (an indicator of cyclical conditions). We use panel data for the euro area and data for 20 individual OECD countries, for the period 1970-2008. We show that countercyclical fiscal policy is less frequent in euro area countries than in other OECD countries. Since 1999, fiscal policies in the euro area have no longer been procyclical during good times, but they have been procyclical during bad times in two countries, Austria and Portugal.