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The dynamic behaviour of budget components and output

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Author Info
Antonio Afonso () (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
Peter Claeys () (European University Institute, Via della Piazzuola, 43, I-50133 Firenze, Italy.)

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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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Paper provided by European Central Bank in its series Working Paper Series with number 775.

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Length: 46 pages
Date of creation: Jul 2007
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Handle: RePEc:ecb:ecbwps:20070775

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Related research
Keywords: Fiscal indicator; structural balance; SGP; SVAR; short and long-term restrictions.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luigi Landolfo, 2007. "Modeling the impact of external factors on the euro area’s HICP and real economy - a focus on pass-through and the trade balance," Working Paper Series 789, European Central Bank. [Downloadable!]
  2. António Afonso & Luca Agnello & Davide Furceri & Ricardo M. Sousa, 2009. "Assessing Long-Term Fiscal Developments: a New Approach," Working Papers 2009/19, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
    Other versions:
  3. Ricardo M. Sousa & António Afonso, 2008. "The Macroeconomic Effects of Fiscal Policy," NIPE Working Papers 22/2008, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  4. Ricardo M. Sousa & António Afonso, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," NIPE Working Papers 3/2009, NIPE - Universidade do Minho. [Downloadable!]
    Other versions:
  5. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
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