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Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach

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  • Agnello, Luca
  • Cimadomo, Jacopo

Abstract

This paper explores how discretionary fiscal policies on the revenue side of the government budget have reacted to economic fluctuations in European Union countries. For this purpose, it uses data on legislated revenue changes and structural indicators provided twice per year by National Central Banks of European Union countries in the ESCB framework for analysing fiscal policy. The analysis is based on the estimation of fiscal policy rules linking these measures of legislated fiscal policy changes to the output gap and other control variables. Then, baseline results are compared with regression estimates where variations of cyclically-adjusted indicators are used as proxy for discretionary fiscal policies, as conventionally proposed in the empirical literature on fiscal policy. Results suggest that, overall, legislated changes in taxes and social security contributions have responded in a strongly pro-cyclical way to the business cycle, while commonly-used cyclical-adjustment methods point to a-cyclicality. JEL Classification: E62, E65, H20

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1118.

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Date of creation: Nov 2009
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Handle: RePEc:ecb:ecbwps:20091118

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Keywords: cyclical sensitivity; Discretionary fiscal policies; ESCB disaggregated framework; government revenues; legislation changes; narrative approach;

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Cited by:
  1. Benkovskis, Konstantins & Caivano, Michele & D’Agostino, Antonello & Dieppe, Alistair & Hurtado, Samuel & Karlsson, Tohmas & Ortega, Eva & Várnai, Tímea, 2011. "Assessing the sensitivity of inflation to economic activity," Working Paper Series, European Central Bank 1357, European Central Bank.
  2. Bolt, Wilko & Foote, Elizabeth & Schmiedel, Heiko, 2011. "Consumer credit and payment cards," Working Paper Series, European Central Bank 1387, European Central Bank.
  3. Cimadomo, Jacopo & Hauptmeier, Sebastian & Zimmermann, Tom, 2013. "Fiscal consolidations and bank balance sheets," Working Paper Series, European Central Bank 1511, European Central Bank.
  4. Afonso, António & Jalles, João Tovar, 2011. "Economic performance and government size," Working Paper Series, European Central Bank 1399, European Central Bank.
  5. Anderton, Robert & Tewolde, Tadios, 2011. "The global financial crisis: trying to understand the global trade downturn and recovery," Working Paper Series, European Central Bank 1370, European Central Bank.
  6. Manuel Coutinho Pereira & Lara Wemans, 2013. "Output effects of a measure of tax shocks based on changes in legislation for Portugal," Working Papers w201315, Banco de Portugal, Economics and Research Department.
  7. Jacopo Cimadomo & Sebastian Hauptmeier & Tom Zimmermann, 2012. "Fiscal Consolidations and Banking Stability," Working Papers 2012-32, CEPII research center.
  8. Manuel Coutinho Pereira & Lara Wemans, 2013. "The macroeconomic effects of legislated tax changes in Portugal," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  9. Mohl, Philipp & Hagen, Tobias, 2011. "Do EU structural funds promote regional employment? Evidence from dynamic panel data models," Working Paper Series, European Central Bank 1403, European Central Bank.

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