Université de Lausanne
Ecole des HEC
Département d'économétrie et d'économie politique

DEEP-EPFL Seminars in Macroeconomics

Wednesday November 12, 2008, 13:00
Extranef, Dorigny, room 126

Roel BEETSMA
(University of Amsterdam, The Netherlands)

Fiscal Adjustment to Cyclical Developments in the OECD:

An Empirical Analysis Based on Real-Time Data

Abstract

Estimation of fiscal policy reaction functions usually links fiscal outcomes to macroeconomic and possibly other factors. This approach ignores that those outcomes are the result of both a planning and an implementation stage. In this paper, we explore the determinants of both stages of the fiscal process for OECD countries during the period 1995-2006. We first estimate standard fiscal rules using ex-ante data (i.e. forecasts). We then estimate how fiscal policy reacts to new information, especially on the business cycle. There are marked differences between planned behaviour and responses to new information, as well as between the fiscal policy of the EU countries and the other OECD countries. Planned fiscal policy is a-cyclical for the EU countries and counter-cyclical for the other countries. However, in the implementation stage, the EU countries react pro-cyclically to unexpected changes in the output gap, while the responses of the other OECD countries are acyclical. These findings show that the empirical distinction between the two fiscal stages is crucial and that the relatively strong emphasis on ex-ante compliance with fiscal rules (such as Europe’s Stability and Convergence Programs) may be misleading. Our results also show that it is important to analyse the two stages jointly, because more ambitious plans lead to larger implementation errors. Finally, real-time data have the advantage that the information sets of the policymakers when they take their decisions can be better approximated than with revised data, which are commonly used, but which often undergo substantial changes as a result of information that is not available at decision moments.

Web site of the seminar (with paper online): http://www.hec.unil.ch/deep/evenements-english/e-sem-all-2008-09.htm