Fiscal Policy Adjustments in the Euro Area Stressed Countries: New Evidence from Non-Linear Models with State-Varying Thresholds

33 Pages Posted: 16 Oct 2015

See all articles by Roberto A. De Santis

Roberto A. De Santis

European Central Bank (ECB) - Directorate General Economics

Gabriella Deborah Legrenzi

Keele University - Department of Economics

Costas Milas

University of Liverpool

Date Written: October 16, 2015

Abstract

We introduce a non-linear model to study the adjustment of fiscal policy variables in Greece, Ireland, Portugal and Spain over the last 50 years, based on endogenously estimated budget deficit-to-GDP thresholds, which vary with fiscal disequilibria, the economic cycle and financial market conditions. We find that the budget deficit-to-GDP thresholds were rather high for Greece and Portugal particularly after 1999 and that the fiscal adjustments in "good" times were very different from the adjustments that took place in "bad" times. We also found that only in Spain fiscal deficits were reduced in expansionary times. Finally, we provide evidence that, under financial market pressure, fiscal authorities relaxed the fiscal deficit-to-GDP threshold for the adjustment in Ireland and Spain and reduced such threshold for the adjustment in Portugal.

Keywords: fiscal adjustments, budgetary disequilibria, European debt crisis, non-linear models, euro periphery

JEL Classification: H63, H20, H60, C22

Suggested Citation

De Santis, Roberto A. and Legrenzi, Gabriella Deborah and Milas, Costas, Fiscal Policy Adjustments in the Euro Area Stressed Countries: New Evidence from Non-Linear Models with State-Varying Thresholds (October 16, 2015). ECB Working Paper No. 1858. Available at SSRN: https://ssrn.com/abstract=2675054

Roberto A. De Santis (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Gabriella Deborah Legrenzi

Keele University - Department of Economics ( email )

ST5 5BG Staffordshire, Staffs, ST5 5BG
United Kingdom

Costas Milas

University of Liverpool ( email )

Chatham Street
Liverpool
United Kingdom

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