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Fiscal developments in the euro area beyond the crisis: some lessons drawn from fiscal reaction functions

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  • Dufrénot G.
  • Paul L.

Abstract

In this paper, we examine whether the fact that governments incorporate an objective of sustainability in their budgetary decisions is an element likely to increase the likelihood of a decrease in their deficit and debt ratios beyond the crisis (over the years from 2010 to 2015). We estimate a fiscal reaction function for the Euro area countries and demonstrate that the discretionary policies seem to be pro cyclical in average, thereby influencing the budget balance in the opposite direction than the automatic stabilizers. Our simulations of these rules over the next five years lead us to conclude that two groups of countries could emerge as regards their respective budgetary situations. On the one hand, some “virtuous” countries whose structural deficits will diminish whatever the “exit crisis” scenario envisaged, whereas on the other side, others will not succeed in stabilizing their national debt ratio, because their discretionary fiscal policy is less pro cyclical.

Suggested Citation

  • Dufrénot G. & Paul L., 2010. "Fiscal developments in the euro area beyond the crisis: some lessons drawn from fiscal reaction functions," Working papers 292, Banque de France.
  • Handle: RePEc:bfr:banfra:292
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    References listed on IDEAS

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    12. Agnès Bénassy-Quéré & Jacopo Cimadomo, 2006. "Changing Patterns of Domestic and Cross-Border Fiscal Policy Multipliers in Europe and the US," Working Papers 2006-24, CEPII research center.
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    More about this item

    Keywords

    euro zone ; exit crisis scenario ; fiscal policy;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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