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The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data

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Author Info

  • Andrew Hughes Hallett

    (George Mason University and University of St Andrews)

  • Moritz Kuhn

    (University of Bonn)

  • Thomas Warmedinger

    (European Central Bank)

Abstract

The use of real-time cash data allows us to make accurate intra-annual forecasts of an economy’s fiscal position, and to issue early warning signals for the need to correct fiscal imbalances. This paper shows how those signals can be used to design the necessary fiscal corrections, and discusses the gains that can be achieved from such interventions. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. We also show that, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improve-ment tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries.

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Bibliographic Info

Article provided by Europa Grande in its journal European Journal of Government and Economics.

Volume (Year): 1 (2012)
Issue (Month): 1 (June)
Pages: 44-65

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Handle: RePEc:egr:ejge00:v:1:i:1:p:44-65

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Related research

Keywords: fiscal surveillance; early warning; cash data; additive vs. slope adjustments; fiscal credibility;

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References

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  1. Andrew Hughes Hallett, 2008. "Debt targets and fiscal sustainability in an era of monetary independence," International Economics and Economic Policy, Springer, Springer, vol. 5(1), pages 165-187, July.
  2. Eric M. Leeper, 2009. "Anchoring fiscal expectations," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 72, pages 17-42, September.
  3. Onorante, Luca & Pedregal, Diego J. & Pérez, Javier J. & Signorini, Sara, 2010. "The usefulness of infra-annual government cash budgetary data for fiscal forecasting in the euro area," Journal of Policy Modeling, Elsevier, Elsevier, vol. 32(1), pages 98-119, January.
  4. Beetsma, Roel & Giuliodori, Massimo, 2007. "On the Relationship between Fiscal Plans in the European Union: An Empirical Analysis Based on Real-Time Data," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6088, C.E.P.R. Discussion Papers.
  5. Andrew Hughes Hallett, 2008. "Coordination without Explicit Cooperation: Monetary-Fiscal Interactions in an Era of Demographic Change," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 305, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5043, C.E.P.R. Discussion Papers.
  7. Perez, Javier J., 2007. "Leading indicators for euro area government deficits," International Journal of Forecasting, Elsevier, Elsevier, vol. 23(2), pages 259-275.
  8. Richard Morris & Hedwig Ongena & Ludger Schuknecht, 2006. "The reform and implementation of the Stability and Growth Pact," Occasional Paper Series 47, European Central Bank.
  9. Acocella, Nicola & Di Bartolomeo, Giovanni & Hughes Hallett, Andrew, 2008. "When Can Central Banks Anchor Expectations? Policy communication and controllability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7078, C.E.P.R. Discussion Papers.
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Cited by:
  1. Jacopo Cimadomo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Papers 11-25, Federal Reserve Bank of Philadelphia.
  2. Asimakopoulos, Stylianos & Paredes, Joan & Warmedinger, Thomas, 2013. "Forecasting fiscal time series using mixed frequency data," Working Paper Series, European Central Bank 1550, European Central Bank.

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