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The dynamic behaviour of budget components and output

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  • Afonso, António
  • Claeys, Peter

Abstract

The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability. JEL Classification: E62, E65, E66, H61, H62

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0775.

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Date of creation: Jul 2007
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Handle: RePEc:ecb:ecbwps:20070775

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Keywords: fiscal indicator; SGP; short and long-term restrictions; structural balance; SVAR;

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Citations

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Cited by:
  1. António Afonso & Ricardo Sousa, 2011. "The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis," Portuguese Economic Journal, Springer, vol. 10(1), pages 61-82, April.
  2. António Afonso & Peter Claeys & Ricardo M. Sousa, 2009. "Fiscal Regime Shifts in Portugal," NIPE Working Papers 25/2009, NIPE - Universidade do Minho.
  3. António Afonso & Ricardo M. Sousa, 2008. "The Macroeconomic Effects of Fiscal Policy," Working Papers Department of Economics 2008/56, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. António Afonso & Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2009. "Assessing Long-Term Fiscal Developments: a New Approach," Working Papers Department of Economics 2009/19, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Fukuda, Kosei, 2009. "Measuring major and minor cycles in univariate economic time series," Economic Modelling, Elsevier, vol. 26(5), pages 1093-1100, September.
  6. António Afonso, 2013. "Anatomy of a fiscal débacle: the case of Portugal," Working Papers Department of Economics 2013/01, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Afonso, António & Sousa, Ricardo M., 2011. "What are the effects of fiscal policy on asset markets?," Economic Modelling, Elsevier, vol. 28(4), pages 1871-1890, July.

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