The Cyclical Response of Fiscal Policies in the Euro Area: Why Do Results of Empirical Research Differ So Strongly?

50 Pages Posted: 15 Mar 2008

See all articles by Sandro Momigliano

Sandro Momigliano

Bank of Italy

Roberto Golinelli

University of Bologna - Department of Economics

Date Written: January 2008

Abstract

Whether discretionary fiscal policies in industrialized countries act counter- or pro-cyclically and whether their reaction is symmetric or asymmetric over the cycle are still largely unsettled questions. This uncertainty remains even when attention is restricted to euro-area countries, where these questions have important implications for the debate on European fiscal rules. We review the recent empirical literature to explain why the results of the various studies differ so greatly. We find that differences are driven partly by the choices made in modelling fiscal behaviour and in the related notions of fiscal policy cyclicality. Results are also affected by data source and vintage (ex post or real-time). The time period chosen is relatively less important. We conclude that the notion of pro-cyclical fiscal policies often upheld in the debate is not justified by the data. Ex post data suggest either a-cyclicality or weak counter-cyclicality. Real-time information gives clearer indications of counter-cyclical behaviour, especially when we progress from a very simple "core" model to a more complex one, including at least the impact of fiscal rules. As for symmetry or asymmetry, the answer varies with sources of data and time periods. With the more complex model the indications of asymmetric behaviour are more robust. Whenever asymmetry is present, it entails shifts in all the parameters of the fiscal rule and not necessarily in the output gap parameter.

Keywords: fiscal policy, euro-area countries, fiscal rules, pro and counter-cyclical policies, policy symmetry over the cycle, ex post and real-time data, dynamic panel models

JEL Classification: E61, D72, E62, H60

Suggested Citation

Momigliano, Sandro and Golinelli, Roberto, The Cyclical Response of Fiscal Policies in the Euro Area: Why Do Results of Empirical Research Differ So Strongly? (January 2008). Bank of Italy Temi di Discussione (Working Paper) No. 654, Available at SSRN: https://ssrn.com/abstract=1105717 or http://dx.doi.org/10.2139/ssrn.1105717

Sandro Momigliano (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberto Golinelli

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

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