Working Paper: CEPR ID: DP6692
Authors: Roel Beetsma; Massimo Giuliodori
Abstract: We explore how fiscal policies in the OECD have responded to unexpected information about the economy during the period 1995-2006. In particular, 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. In this second step, we use various approaches in dealing with potential endogeneity and changes in data construction methodology after the ex ante data were released. All variants lead to similar results. There are marked differences between ex-ante behaviour and responses to new information, as well as between fiscal policy of the EU countries and the other OECD countries. In particular, the EU countries react in a pro-cyclical way to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. However, ex ante fiscal policy is a-cyclical for the EU countries and counter-cyclical for the other countries.
Keywords: Cyclicality; EU; First-release data; Fiscal policy; OECD; Real-time data
JEL Codes: E62; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ex-ante fiscal policy for EU countries (E62) | acyclical behavior (E32) |
| ex-ante fiscal policy for non-EU countries (F42) | countercyclical behavior (E32) |
| new information about the output gap (E23) | EU countries' procyclical reaction (F44) |
| deterioration in the business cycle (E32) | discretionary fiscal contractions in EU countries (E62) |
| new economic information (D89) | non-EU countries' acyclical responses (F36) |
| planned fiscal stance in EU countries (E62) | more relaxed during election years (K16) |
| planned fiscal stance in EU countries (E62) | tightens in response to anticipated violations of EU deficit restrictions (E62) |