Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data

35 Pages Posted: 10 Jun 2008

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies

Date Written: March 1, 2008

Abstract

Empirical fiscal policy reaction functions based on ex-post data cannot be said to describe fiscal policymakers intentions because they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policy makers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1995-2006 using both types of data. We exploit the information contained in real time and ex-post data and develop a new approach to estimating the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data in an attempt to estimate potential output or the structural budget. We find that the often commented on pro-cyclicality of discretionary policy only arises in the ex-post data; the real time data suggests that policymakers have tried to run counter-cyclical discretionary policy, but find it hard to do so due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal responses and stronger estimates of the discretionary responses to the output gap.

Keywords: Discretion, Fiscal Policy, Real Time Data

JEL Classification: E61, E62

Suggested Citation

Bernoth, Kerstin and Hughes Hallett, Andrew J. and Lewis, John, Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data (March 1, 2008). Available at SSRN: https://ssrn.com/abstract=1141663

Kerstin Bernoth (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Andrew J. Hughes Hallett

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-322-8539 (Phone)
615-343-8495 (Fax)

John Lewis

De Nederlandsche Bank - Econometric Research and Special Studies ( email )

Amsterdam
Netherlands

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