The Dynamic Behaviour of Budget Components and Output
Technical University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); European Central Bank (ECB)
European University Institute - Economics Department (ECO); University of Barcelona - Faculty of Economic Science and Business Studies
Economic Modelling, Vol. 25, No. 1, pp. 93-117, 2008
The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a 'ratcheting up' in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability.
Keywords: fiscal indicator, structural balance, output gap, SGP, EMU, SVAR, short and long-term restrictions
JEL Classification: E62, E65, E66, H61, H62Accepted Paper Series
Date posted: January 4, 2008
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