IDEAS home Printed from https://ideas.repec.org/p/eea/boewps/wp2023-3.html
   My bibliography  Save this paper

Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions for the Euro Area

Author

Listed:
  • Karsten Staehr
  • Olegs Tkacevs
  • Katri Urke

Abstract

This paper estimates fiscal reaction functions to examine the importance of inflation and inflation surprises for fiscal outcomes in the euro area countries, covering the first 12 countries to join the euro area. The effect of HICP inflation on the primary fiscal balance in per cent of GDP is positive, and statistically and economically significant. The positive effect stems from both the revenue side, particularly direct taxes and indirect taxes, and the expenditure side, particularly primary current expenditures. The effects of HICP inflation on the primary balance and other fiscal outcomes appear in large part to stem from inflation surprises, which are errors in the inflation forecasts available for preparing budgets. The positive effect on the primary fiscal balance does not exhibit noticeable non-linearities.

Suggested Citation

  • Karsten Staehr & Olegs Tkacevs & Katri Urke, 2023. "Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions for the Euro Area," Bank of Estonia Working Papers wp2023-3, Bank of Estonia, revised 20 Jun 2023.
    • Handle: RePEc:eea:boewps:wp2023-3
    DOI: 10.23656/25045520/052022/0200
    as

    Download full text from publisher

    File URL: http://www.bankofestonia.info/pub/en/dokumendid/publikatsioonid/seeriad/uuringud//https://haldus.eestipank.ee/sites/default/files/2023-05/wp3_2023.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.23656/25045520/052022/0200?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    2. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    3. Jacopo Cimadomo, 2016. "Real-Time Data And Fiscal Policy Analysis: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 302-326, April.
    4. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    5. De Jong, Jasper F.M. & Gilbert, Niels D., 2020. "Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure," European Journal of Political Economy, Elsevier, vol. 61(C).
    6. Mauro, Paolo & Romeu, Rafael & Binder, Ariel & Zaman, Asad, 2015. "A modern history of fiscal prudence and profligacy," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 55-70.
    7. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    8. Ms. Eliane A. Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Working Papers 1998/041, International Monetary Fund.
    9. Reda Cherif & Fuad Hasanov, 2018. "Public debt dynamics: the effects of austerity, inflation, and growth shocks," Empirical Economics, Springer, vol. 54(3), pages 1087-1105, May.
    10. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    11. Eliana Cardoso, 1998. "Virtual Deficits and the Patinkin Effect," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 619-646, December.
    12. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    13. Giovanni B. Pittaluga & Elena Seghezza & Pierluigi Morelli, 2021. "The political economy of hyperinflation in Venezuela," Public Choice, Springer, vol. 186(3), pages 337-350, March.
    14. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
    15. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
    16. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    17. Ichiro Fukunaga & Takuji Komatsuzaki & Hideaki Matsuoka, 2022. "Inflation and public debt reversals in advanced economies," Contemporary Economic Policy, Western Economic Association International, vol. 40(1), pages 124-137, January.
    18. Bettina Bökemeier & Andreea Stoian, 2018. "Debt Sustainability Issues in Central and East European Countries," Eastern European Economics, Taylor & Francis Journals, vol. 56(5), pages 438-470, September.
    19. Roberto Golinelli & Sandro Momigliano, 2009. "The Cyclical Reaction of Fiscal Policies in the Euro Area: The Role of Modelling Choices and Data Vintages," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 39-72, March.
    20. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    21. Alfons Weichenrieder & Jochen Zimmer, 2014. "Euro membership and fiscal reaction functions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 598-613, August.
    22. Oļegs Tkačevs & Kārlis Vilerts, 2019. "The Impact of Government Borrowing Costs on Fiscal Discipline," Kyklos, Wiley Blackwell, vol. 72(3), pages 446-471, August.
    23. Pablo Hernández de Cos & Samuel Hurtado & Francisco Martí & Javier J. Pérez, 2016. "Public finances and inflation: the case of Spain," Occasional Papers 1606, Banco de España.
    24. Everaert, Gerdie & Jansen, Stijn, 2018. "On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?," Economic Modelling, Elsevier, vol. 70(C), pages 87-96.
    25. repec:hal:spmain:info:hdl:2441/7suq9gqkp186e8d6eou29dipgk is not listed on IDEAS
    26. Bańkowski, Krzysztof & Bouabdallah, Othman & Checherita-Westphal, Cristina & Freier, Maximilian & Jacquinot, Pascal & Muggenthaler, Philip, 2023. "Fiscal policy and high inflation," Economic Bulletin Articles, European Central Bank, vol. 2.
    27. Staehr, Karsten, 2008. "Fiscal policies and business cycles in an enlarged euro area," Economic Systems, Elsevier, vol. 32(1), pages 46-69, March.
    28. Michael U. Krause & Stéphane Moyen, 2016. "Public Debt and Changing Inflation Targets," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 142-176, October.
    29. Andrew Hughes Hallett & Rasmus Kattai & John Lewis, 2012. "How Reliable Are Cyclically Adjusted Budget Balances In Real Time?," Contemporary Economic Policy, Western Economic Association International, vol. 30(1), pages 75-92, January.
    30. António Afonso & José Alves & João Tovar Jalles, 2021. "Fiscal Reaction Functions in the EU: A Tale of “r-g” and Whether it Matters," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 65-101.
    31. Afonso, António & Jalles, João Tovar, 2019. "The Fiscal consequences of deflation: Evidence from the Golden Age of Globalization," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 129-147.
    32. Katia Berti & Eugeniu Colesnic & Cyril Desponts & Stephanie Pamies & Etienne Sail, 2016. "Fiscal Reaction Functions for European Union Countries," European Economy - Discussion Papers 028, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    33. Edwards, Sebastian & Tabellini, Guido, 1991. "Explaining fiscal policies and inflation in developing countries," Journal of International Money and Finance, Elsevier, vol. 10(1, Supple), pages 16-48, March.
    34. Steven P. Cassou & Hedieh Shadmani & Jesús Vázquez, 2017. "Fiscal policy asymmetries and the sustainability of US government debt revisited," Empirical Economics, Springer, vol. 53(3), pages 1193-1215, November.
    35. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1837-1847, October.
    36. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.
    37. Don Patinkin, 1993. "Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 103-128, Spring.
    38. Doris Prammer & Lukas Reiss, 2015. "Impact of Inflation on Fiscal Aggregates in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 27-41.
    39. Leeper, Eric M. & Zhou, Xuan, 2021. "Inflation’s role in optimal monetary-fiscal policy," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 1-18.
    40. Thanh Dat Nguyen & Sandy Suardi & Chew Lian Chua, 2017. "The Behavior Of U.S. Public Debt And Deficits During The Global Financial Crisis," Contemporary Economic Policy, Western Economic Association International, vol. 35(1), pages 201-215, January.
    41. Gootjes, Bram & de Haan, Jakob, 2022. "Procyclicality of fiscal policy in European Union countries," Journal of International Money and Finance, Elsevier, vol. 120(C).
    42. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. António Afonso & José Alves & Oļegs Matvejevs & Oļegs Tkačevs, 2023. "Fiscal Sustainability and the Role of Inflation," CESifo Working Paper Series 10843, CESifo.
    2. R. Golinelli & I. Mammi & A. Musolesi, 2018. "Parameter heterogeneity, persistence and cross-sectional dependence: new insights on fiscal policy reaction functions for the Euro area," Working Papers wp1120, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Larch, Martin & Orseau, Eloïse & van der Wielen, Wouter, 2021. "Do EU fiscal rules support or hinder counter-cyclical fiscal policy?," Journal of International Money and Finance, Elsevier, vol. 112(C).
    4. Heimberger, Philipp, 2023. "The cyclical behaviour of fiscal policy: A meta-analysis," Economic Modelling, Elsevier, vol. 123(C).
    5. Taner Turan & Pelin Varol Iyidogan, 2022. "Estimating Fiscal Reaction Functions for Developing and Developed Countries: A Dynamic Panel Threshold Analysis," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(5), pages 393-410, May.
    6. Franc Klaassen, Roel Beetsma and Joao Tovar Jalles, 2023. "How do governments respond to interest rates?," Working Papers REM 2023/0280, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    7. Aldama, Pierre & Creel, Jérôme, 2022. "Real-time fiscal policy responses in the OECD from 1997 to 2018: Procyclical but sustainable?," European Journal of Political Economy, Elsevier, vol. 73(C).
    8. Tamborini, Roberto & Tomaselli, Matteo, 2020. "The determinants of austerity in the European Union 2010–16," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Heimberger, Philipp, 2023. "This time truly is different: The cyclical behaviour of fiscal policy during the Covid-19 crisis," Journal of Macroeconomics, Elsevier, vol. 76(C).
    10. Philipp Heimberger, 2022. "The Cyclical Behaviour of Fiscal Policy During the Covid-19 Crisis," wiiw Working Papers 220, The Vienna Institute for International Economic Studies, wiiw.
    11. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2023. "A quest between fiscal and market discipline," Economic Modelling, Elsevier, vol. 119(C).
    12. Attinasi, Maria Grazia & Palazzo, Alessandra Anna & Pierluigi, Beatrice, 2019. "Fiscal activism in the euro area and in other advanced economies: new evidence," Working Paper Series 2344, European Central Bank.
    13. Everaert, Gerdie & Jansen, Stijn, 2018. "On the estimation of panel fiscal reaction functions: Heterogeneity or fiscal fatigue?," Economic Modelling, Elsevier, vol. 70(C), pages 87-96.
    14. Markus Reischmann, 2016. "Empirical Studies on Public Debt and Fiscal Transfers," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 63.
    15. Serhan Cevik & Vibha Nanda, 2020. "Riding the storm: fiscal sustainability in the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, vol. 34(3), pages 384-399, May.
    16. Beqiraj, Elton & Fedeli, Silvia & Forte, Francesco, 2018. "Public debt sustainability: An empirical study on OECD countries," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 238-248.
    17. Okwoche Princewill U. & Iheonu Chimere O., 2021. "Determinants of fiscal effort in sub-Saharan African countries: Does conflict matter?," Economics and Business Review, Sciendo, vol. 7(2), pages 50-73, June.
    18. António Afonso & José Alves & José Carlos Coelho, 2023. "Determinants of the Degree of Fiscal Sustainability," CESifo Working Paper Series 10225, CESifo.
    19. Katja Schmidt & Antoine Sigwalt, 2022. "Fiscal policy orientation in the euro area in real-time," Working papers 896, Banque de France.
    20. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.

    More about this item

    Keywords

    public finances; fiscal outcome; inflation; inflation surprises;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eea:boewps:wp2023-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peeter Luikmel (email available below). General contact details of provider: https://edirc.repec.org/data/epgovee.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.