Heterogeneity in the Fiscal Reaction Function: An Emperical Analysis for EU Member States

10 Pages Posted: 10 Dec 2020 Last revised: 24 Feb 2021

See all articles by Bettina Bökemeier

Bettina Bökemeier

Bielefeld University - Department of Business Administration and Economics

Andreea Stoian

Bucharest University of Economic Studies - Department of Finance

Bogdan Andrei Dumitrescu

Department of Money and Banking and CEFIMO, Faculty of Finance and Banking, Bucharest University of Economic Studies

Cosmin Cepoi

Department of Money and Banking and CEFIMO, Faculty of Finance and Banking, Bucharest University of Economic Studies

Date Written: September 1, 2020

Abstract

This paper studies heterogeneity in the fiscal reaction function for European Union members by resorting to the unconditional quantile regression estimation. Based on annual observations spanning from 2005 to 2018, the results point to significant asymmetries concerning the fiscal response measured in terms of the cyclically adjusted primary balance to different covariates. First, the primary deficit has a stronger reaction to debt across the lower quantile, which becomes weaker as the balance reaches a surpulus. This indicates the prevalence of fiscal discipline to ensure the public finance sustainability. Moreover, the life-expetancy negatively affects the fiscal polistion and the response is the highest compared to other covariates, which can diminish the debt and business stabilizing response. Governments seem to run more pronounced pro-cyclical fiscal policy when the fiscal position is already deteriorated. These empirical evidences are questioning current as well as future policy design particularly against the background of the recent pandemic situation exerting supplementary social and financial burden on the countries. In addition, the level of economic development matters for the response pattern and the reaction is stronger and positive when countries face poorer fiscal positions. Also, an increase in the longterm interest rate amplifies the deterioration of fiscal balance especially when its condition is already bad. Finally, our estimations show that the fiscal position improves as an effect of educational attainmet and of external position especially when the former reaches surplus.

Keywords: fiscal response function, heterogeneity, fiscal sustainability, unconditional quantile regression

JEL Classification: C21, E62, H63

Suggested Citation

Bökemeier, Bettina and Stoian, Andreea and Dumitrescu, Bogdan Andrei and Cepoi, Cosmin, Heterogeneity in the Fiscal Reaction Function: An Emperical Analysis for EU Member States (September 1, 2020). Bielefeld Working Papers in Economics and Management No. 08-2020, Available at SSRN: https://ssrn.com/abstract=3737499 or http://dx.doi.org/10.2139/ssrn.3737499

Bettina Bökemeier (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Andreea Stoian

Bucharest University of Economic Studies - Department of Finance ( email )

5-7 Mihail Moxa Street, Sector 1
Bucharest, 010961
Romania

Bogdan Andrei Dumitrescu

Department of Money and Banking and CEFIMO, Faculty of Finance and Banking, Bucharest University of Economic Studies ( email )

5-7 Mihail Moxa Street, Sector 1
Bucharest, 010961
Romania

Cosmin Cepoi

Department of Money and Banking and CEFIMO, Faculty of Finance and Banking, Bucharest University of Economic Studies ( email )

5-7 Mihail Moxa Street, Sector 1
Bucharest, 010961
Romania

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