Abstract
Using real-time data, we examine whether fiscal policy has been counter- or procyclical in a panel of 27 European Union (EU) member states over the period 2000–2015. We also investigate whether fiscal rules and government efficiency improve the cyclical reaction of fiscal policy. Our results suggest that even though fiscal plans in EU countries have an acyclical stance, budgetary outcomes are procyclical. Government efficiency and fiscal rules seem to reduce fiscal procyclicality. Further analysis also reveals that fiscal policy seems to be more procyclical in non-euro area countries and in times of economic prosperity.
Highlights
As central banks seem to run out of ammunition to stimulate the economy, fiscal policy has come to the fore
We examine whether the interaction effect between the output gap and the fiscal rules and government efficiency indexes suffers from the assumption of linearity and a lack of common support
We have studied the cyclical stance of discretionary fiscal policy in 27 European Union (EU) member states using a real-time data approach
Summary
As central banks seem to run out of ammunition to stimulate the economy, fiscal policy has come to the fore. Procyclical fiscal policy may undermine the sustainability of public finances, so in European Union (EU) member states As their economies are heavily integrated, fiscal policy in one EU country may have large spillovers to other member states’ economies; these spillovers are generally not internalised (Eyraud et al, 2017). To the best of our knowledge, this is the first study examining the cyclical stance of fiscal policy in EU countries in its different stages using real-time data, while considering at the same time the conditional effect of fiscal rules and government efficiency.. Whereas most previous studies using real-time fiscal data employed Organisation for Economic Co-operation and Development (OECD) data, our analysis is based upon data provided in the Stability and Convergence Programs (SCP) that EU member countries have to submit as part of the fiscal surveillance rules in the EU (Gilbert and de Jong, 2017).
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