Real-Time Determinants of Fiscal Policies in the Euro Area: Fiscal Rules, Cyclical Conditions and Elections
38 Pages Posted: 16 Feb 2012
Date Written: March 30, 2006
We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behavior of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favorable. The estimates are robust to alternative measures of the dependent variable and of the regressors. Many of our results do not carry over when we use the latest available (ex post) information for our regressors or when we apply the same model to a group of 8 OECD countries outside the area.
Keywords: fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle
JEL Classification: E61, D72, E62, H60
Suggested Citation: Suggested Citation