Fiscal rules, inertia and discretionary fiscal policy
In current practice, changes in the cyclically-adjusted budget balance (CAB) are interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, as, in some cases, it may conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, systematic optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion compared to plans, even in the absence of discretionary measures. In order to track down this kind of passive behaviour in the light of growth surprises or sanguine growth assumptions the traditional reading of the CAB needs to be adjusted. This is achieved by relaxing the benchmark assumption according to which, under unchanged fiscal policy, the deficit-to-GDP ratio is invariant to growth. An empirical application to public finance data of four large EU countries shows that passive behaviour is an important element in practice, as forecast errors are significant in explaining changes in the CAB. Moreover, in some cases official growth forecasts appear to have a clear upward bias.
Volume (Year): 37 (2005)
Issue (Month): 10 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAEC20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAEC20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier Blanchard & Roberto Perotti, 2002.
"An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output,"
The Quarterly Journal of Economics,
MIT Press, vol. 117(4), pages 1329-1368, November.
- Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
- George Kopits & Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 162, International Monetary Fund.
- Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
- Roberto Perotti, 2005.
"Estimating the effects of fiscal policy in OECD countries,"
Federal Reserve Bank of San Francisco.
- Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- F. Ballabriga & C. Martinez-Mongay, 2002. "Has EMU shifted policy?," European Economy - Economic Papers 166, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Edward M. Gramlich, 1990. "Fiscal Indicators," OECD Economics Department Working Papers 80, OECD Publishing.
- Michael Artis & Massimiliano Marcellino, 2001.
"Fiscal forecasting: The track record of the IMF, OECD and EC,"
Royal Economic Society, vol. 4(1), pages S20-S36.
- Artis, M. & Marcellino, M., 1999. "Fiscal Forecasting: the Track Record of the IMF, OECD and EC," Economics Working Papers eco99/22, European University Institute.
- Artis, Michael J & Marcellino, Massimiliano, 1999. "Fiscal Forecasting: the Track Record of the IMF, OECD, and EC," CEPR Discussion Papers 2206, C.E.P.R. Discussion Papers.
- Jordi Gali & Roberto Perotti, 2003.
"Fiscal Policy and Monetary Integration in Europe,"
NBER Working Papers
9773, National Bureau of Economic Research, Inc.
- John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
- Jean-Claude Chouraqui & Robert P. Hagemann & Nicola Sartor, 1990. "Indicators of Fiscal Policy: A Re-Examination," OECD Economics Department Working Papers 78, OECD Publishing.
- Torsten Persson & Guido Tabellini, .
"Political Institutions and Policy Outcomes: What are the Stylized Facts?,"
189, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Temi di discussione (Economic working papers) 412, Bank of Italy, Economic Research and International Relations Area.
- Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What Are the Stylized Facts?," CESifo Working Paper Series 459, CESifo Group Munich.
- Persson, Torsten & Tabellini, Guido, 2001. "Political Institutions and Policy Outcomes: What are the Stylized Facts?," CEPR Discussion Papers 2872, C.E.P.R. Discussion Papers.
- repec:cup:cbooks:9780521440196 is not listed on IDEAS
- Fatás, Antonio & Mihov, Ilian, 2002.
"The Case for Restricting Fiscal Policy Discretion,"
CEPR Discussion Papers
3277, C.E.P.R. Discussion Papers.
- Alberto Alesina & Roberto Perotti, 1996.
"Budget Deficits and Budget Institutions,"
NBER Working Papers
5556, National Bureau of Economic Research, Inc.
- Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
- Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
- G. A. Mackenzie, 1989. "Are All Summary Indicators of the Stance of Fiscal Policy Misleading?," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 743-770, December.
- Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
- Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001.
"Cyclically Adjusted Budget Balances: an Alternative Approach,"
77, Quebec a Montreal - Recherche en gestion.
- Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 0077, European Central Bank.
- Marco Buti & Paul van den Noord, 2003. "Discretionary Fiscal Policy and Elections: The Experience of the Early Years of EMU," OECD Economics Department Working Papers 351, OECD Publishing.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
- Christopher Allsopp & Michael J. Artis, 2003. "The Assessment: EMU, Four Years On," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 1-29.
- Braconier, Henrik & Holden, Steinar, 1999. "The Public Budget Balance - Fiscal Indicators and Cyclical Sensitivity in the Nordic Countries," Working Paper 67, National Institute of Economic Research.
When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:37:y:2005:i:10:p:1135-1146. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.