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Real-time determinants of fiscal policies in the euro area: Fiscal rules, cyclical conditions and elections

  • Roberto Golinelli


    (University of Bologna, Department of Economics)

  • Sandro Momigliano


    (Bank of Italy, Economic Research Department)

We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 609.

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Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bdi:wptemi:td_609_06
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