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Fiscal adjustment to cyclical developments in the OECD: an empirical analysis based on real-time data

Using real-time data, we explore the determinants of both fiscal plans and their implementation for OECD countries over the period 1995--2006. First, based on forecasts we estimate standard fiscal rules. Then, we explore how fiscal policy responds to new information, especially on the business cycle. There are marked differences in behaviour between the planning and implementation stages, as well as between the fiscal policy of EU countries and other OECD countries. Planned fiscal policy is a-cyclical for EU countries and counter-cyclical for the other countries. However, in the implementation stage, the EU countries react pro-cyclically to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. Hence, the empirical distinction between the two fiscal stages is crucial, while the relatively strong emphasis on ex ante, as opposed to ex post, compliance with fiscal rules (such as Europe's Stability and Convergence Programs) seems misguided. Copyright 2010 Oxford University Press 2009 All rights reserved, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 62 (2010)
Issue (Month): 3 (July)
Pages: 419-441

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Handle: RePEc:oup:oxecpp:v:62:y:2010:i:3:p:419-441
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  1. Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
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