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Did fiscal policy makers know what they were doing? Reassessing fiscal policy with real-time data

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  • Kerstin Bernoth
  • Andrew Hughes Hallet
  • John Lewis

Abstract

Empirical fiscal policy reaction functions based on ex post data cannot be said to describe fiscal policymakers intentions, since they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policymakers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1994-2006 using both types of data. We exploit the information contained in real-time and ex post data and develop a new approach to estimate the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data upfront in an attempt to estimate potential output or the structural budget. We find that the often commented upon pro-cyclicality of discretionary policy arises only with ex post data; the real time data suggests that policymakers are seeking to run counter cyclical discretionary policy, but find it hard to do so in practice due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal response and stronger estimates of the discretionary fiscal response to an output gap.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 169.

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Date of creation: Apr 2008
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Handle: RePEc:dnb:dnbwpp:169

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Keywords: Fiscal Policy; Real Time Data; Discretion;

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Citations

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Cited by:
  1. Georgios Efthyvoulou, 2012. "Political budget cycles in the European Union and the impact of political pressures," Public Choice, Springer, vol. 153(3), pages 295-327, December.
  2. Guido Baldi & Karsten Staehr, 2013. "The European Debt Crisis and Fiscal Reaction Functions in Europe 2000-2012," Discussion Papers of DIW Berlin 1295, DIW Berlin, German Institute for Economic Research.
  3. Beetsma, Roel & Bluhm, Benjamin & Giuliodori, Massimo & Wierts, Peter, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," CEPR Discussion Papers 8413, C.E.P.R. Discussion Papers.
  4. Gabrisch, Hurbert & Orlowski, Lucjan & Pusch, Toralf, 2012. "Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries," Working Papers 2012002, Sacred Heart University, John F. Welch College of Business.
  5. Roel Beetsma & Benjamin Bluhm & Massimo Giuliodori & Peter Wierts, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," Tinbergen Institute Discussion Papers 11-080/2, Tinbergen Institute.
  6. Jacopo Cimadomo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Papers 11-25, Federal Reserve Bank of Philadelphia.
  7. Balázs Égert, 2010. "Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-cyclical?," OECD Economics Department Working Papers 763, OECD Publishing.
  8. Cepparulo, Alessandra & Gastaldi, Francesca & Giuriato, Luisa & Sacchi, Agnese, 2011. "Budgeting versus implementing fiscal policy:the Italian case," MPRA Paper 32474, University Library of Munich, Germany.
  9. Álvaro M. Pina, 2009. "Elusive Counter-Cyclicality and Deliberate Opportunism? Fiscal Policy from Plans to Final Outcomes," Working Papers w200906, Banco de Portugal, Economics and Research Department.
  10. Ioannou, Demosthenes & Stracca, Livio, 2011. "Have euro area and EU economic governance worked? Just the facts," Working Paper Series 1344, European Central Bank.

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