Working Paper: NBER ID: w14722
Authors: Antonio Fatas; Ilian Mihov
Abstract: The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.
Keywords: Fiscal policy; Euro area; Stability and Growth Pact; Countercyclical policy; Procyclical policy
JEL Codes: E62; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy in the euro area has been mildly procyclical (E62) | Economic fluctuations are amplified (E32) |
| Fiscal policy in the euro area has been mildly procyclical (E62) | Cyclically adjusted fiscal balances (H68) |
| Automatic stabilizers in fiscal policy react more strongly in euro area countries (E63) | Fiscal policy behavior (E62) |
| U.S. fiscal policy is characterized as distinctly countercyclical (E62) | Economic fluctuations are stabilized (E32) |
| Primary balance in OECD economies is more responsive to output growth (F41) | Fiscal policy behavior (E62) |
| Decline in volatility of discretionary fiscal policy (E63) | Fiscal policy stability (E63) |
| Institutional changes did not significantly alter procyclical behavior (E70) | Cyclical behavior of fiscal policy in the euro area (E62) |