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

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  • Hughes Hallett, Andrew
  • Kuhn, Moritz
  • Warmedinger, Thomas

Abstract

This paper does two things. First it examines the use of real time inter-annual cash data and the role of early interventions for improving the monitoring of national fiscal policies and the correction of fiscal indiscipline. Early warnings are important because they allow us to spread the necessary adjustments over time. 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. Second, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement 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. JEL Classification: E62, H50, H68

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1220.

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Date of creation: Jul 2010
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Handle: RePEc:ecb:ecbwps:20101220

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

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References

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  1. Richard Morris & Hedwig Ongena & Ludger Schuknecht, 2006. "The reform and implementation of the Stability and Growth Pact," Occasional Paper Series 47, European Central Bank.
  2. 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 6088, C.E.P.R. Discussion Papers.
  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, vol. 32(1), pages 98-119, January.
  4. Acocella, Nicola & Di Bartolomeo, Giovanni & Hughes Hallett, Andrew, 2008. "When Can Central Banks Anchor Expectations? Policy communication and controllability," CEPR Discussion Papers 7078, C.E.P.R. Discussion Papers.
  5. Eric M. Leeper, 2009. "Anchoring Fiscal Expectations," Caepr Working Papers 2009-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. Andrew Hughes Hallett, 2008. "Debt targets and fiscal sustainability in an era of monetary independence," International Economics and Economic Policy, Springer, vol. 5(1), pages 165-187, July.
  7. Andrew Hughes Hallett, 2008. "Coordination without Explicit Cooperation: Monetary-Fiscal Interactions in an Era of Demographic Change," European Economy - Economic Papers 305, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. Perez, Javier J., 2007. "Leading indicators for euro area government deficits," International Journal of Forecasting, Elsevier, vol. 23(2), pages 259-275.
  9. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
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Cited by:
  1. Asimakopoulos, Stylianos & Paredes, Joan & Warmedinger, Thomas, 2013. "Forecasting fiscal time series using mixed frequency data," Working Paper Series 1550, European Central Bank.
  2. Jacopo Cimadomo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Papers 11-25, Federal Reserve Bank of Philadelphia.

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