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Real time uncertainty in fiscal planning and debt accumulation in the euro area

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  • Paloviita, Maritta

    ()
    (Bank of Finland Research)

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    Abstract

    This study explores real time uncertainty in euro area fiscal policies since the late 1990s. Using real time data from the OECD Economic Outlook publications we investigate the impact of real time uncertainty on fiscal planning and debt accumulation separately for two country groups in the euro area: countries in geographical periphery (Greece, Ireland, Italy, Portugal and Spain) and other euro area countries (Austria, Belgium, Finland, France, Germany and the Netherlands). The results indicate that real time uncertainty substantially affects fiscal planning. Ex ante fiscal plans have generally been long-term oriented and counter-cyclical in the euro area, but in the periphery countries policies have been more sensitive to economic cycles and less long-term oriented than in the other countries. We find evidence that high indebtedness in the periphery countries cannot be explained by short-term pro-cyclical ex ante fiscal planning. Instead, high initial debt ratios, policy changes after the budget-planning stage and cumulated macroeconomic imbalances have contributed substantially to accumulated debt ratios. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation, which are central in the new EU fiscal framework, are crucial for sound and sustainable public finances.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1235.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 35/2012.

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    Length: 29 pages
    Date of creation: 21 Nov 2012
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2012_035

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: fiscal policy; debt accumulation; real time data; cyclical sensitivity; economic crisis;

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    References

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    1. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
    2. Candelon, Bertrand & Muysken, Joan & Vermeulen, Robert, 2007. "Fiscal Policy and Monetary Integration in Europe: An Update," Research Memorandum 050, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    3. António Afonso & Luca Agnello & Davide Furceri, 2008. "Fiscal Policy Responiveness, Persistence and Discretion," Working Papers Department of Economics 2008/50, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    4. Jacopo Cimadomo, 2007. "Fiscal Policy in Real Time," Working Papers 2007-10, CEPII research center.
    5. Jacopo Cimadomo, 2011. "Real-Time Data and Fiscal Policy Analysis: a Survey of the Literature," Working Papers 2011-20, CEPII research center.
    6. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
    7. Roel Beetsma & Massimo Giuliodori, 2010. "Fiscal adjustment to cyclical developments in the OECD: an empirical analysis based on real-time data," Oxford Economic Papers, Oxford University Press, vol. 62(3), pages 419-441, July.
    8. Philip R. Lane, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," Trinity Economics Papers 20032, Trinity College Dublin, Department of Economics.
    9. Pierre-Olivier Beffy & Patrice Ollivaud & Pete Richardson & Franck Sédillot, 2006. "New OECD Methods for Supply-side and Medium-term Assessments: A Capital Services Approach," OECD Economics Department Working Papers 482, OECD Publishing.
    10. Álvaro M. Pina, 2009. "Elusive Counter-Cyclicality and Deliberate Opportunism? Fiscal Policy from Plans to Final Outcomes," Working Papers w200906, Banco de Portugal, Economics and Research Department.
    11. Staehr, Karsten, 2008. "Fiscal policies and business cycles in an enlarged euro area," Economic Systems, Elsevier, vol. 32(1), pages 46-69, March.
    12. Paloviita, Maritta & Kinnunen, Helvi, 2011. "Real time analysis of euro area fiscal policies: adjustment to the crisis," Research Discussion Papers 21/2011, Bank of Finland.
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    Cited by:
    1. Guido Baldi & Karsten Staehr, 2013. "The European Debt Crisis and Fiscal Reaction Functions in Europe 2000-2012," Discussion Papers of DIW Berlin 1295, DIW Berlin, German Institute for Economic Research.

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