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Did fiscal policy makers know what they were doing? Reassessing fiscal policy with real-time data

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  • Kerstin Bernoth
  • Andrew Hughes Hallet
  • John Lewis

Abstract

Empirical fiscal policy reaction functions based on ex post data cannot be said to describe fiscal policymakers intentions, since they utilise data which did not exist when their decisions were made. A characterisation of what fiscal policymakers were trying to do requires real time data. This paper compares fiscal policy reaction functions for 14 European countries over the period 1994-2006 using both types of data. We exploit the information contained in real-time and ex post data and develop a new approach to estimate the automatic and discretionary fiscal policy responses to changing economic conditions. This avoids the uncertainties and inaccuracies associated with filtering the data upfront in an attempt to estimate potential output or the structural budget. We find that the often commented upon pro-cyclicality of discretionary policy arises only with ex post data; the real time data suggests that policymakers are seeking to run counter cyclical discretionary policy, but find it hard to do so in practice due to data constraints. Compared to elsewhere in the literature, our model yields lower estimates of the automatic fiscal response and stronger estimates of the discretionary fiscal response to an output gap.

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  • Kerstin Bernoth & Andrew Hughes Hallet & John Lewis, 2008. "Did fiscal policy makers know what they were doing? Reassessing fiscal policy with real-time data," DNB Working Papers 169, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:169
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    Cited by:

    1. Avellan, Leopoldo & Vuletin, Guillermo, 2015. "Fiscal procyclicality and output forecast errors," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 193-204.
    2. 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.
    3. Maritta Paloviita, 2017. "Real time uncertainty in fiscal planning and debt accumulation in the euro area," International Economics and Economic Policy, Springer, vol. 14(1), pages 43-59, January.
    4. Baldi, Guido & Staehr, Karsten, 2016. "The European debt crisis and fiscal reactions in Europe 2000-2014," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 297-317.
    5. Balázs Égert, 2014. "Fiscal policy reaction to the cycle in the OECD: pro- or counter-cyclical?," Mondes en développement, De Boeck Université, vol. 0(3), pages 35-52.
    6. Alexander D Klemm, 2014. "Fiscal Policy in Latin America over the Cycle," IMF Working Papers 14/59, International Monetary Fund.
    7. Gabrisch, Hubert & Orlowski, Lucjan T. & Pusch, Toralf, 2012. "Sovereign default Risk in the Euro-Periphery and the Euro-Candidate Countries," MPRA Paper 41265, University Library of Munich, Germany.
    8. Jacopo Cimadomo, 2016. "Real-Time Data And Fiscal Policy Analysis: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 302-326, April.
    9. Georgios Efthyvoulou, 2012. "Political budget cycles in the European Union and the impact of political pressures," Public Choice, Springer, vol. 153(3), pages 295-327, December.
    10. Croushore, Dean & van Norden, Simon, 2014. "Fiscal policy: ex ante and ex post," Working Papers 14-22, Federal Reserve Bank of Philadelphia.
    11. Guido Baldi & Karsten Staehr, 2013. "The European debt crisis and fiscal reaction functions in Europe 2000–2012," Bank of Estonia Working Papers wp2013-5, Bank of Estonia, revised 24 Jul 2013.
    12. Stracca, Livio & Ioannou, Demosthenes, 2011. "Have euro area and EU economic governance worked? Just the facts," Working Paper Series 1344, European Central Bank.
    13. Cronin, David & McQuinn, Kieran, 2017. "The cyclicality of Irish fiscal policy ex-ante and ex-post," Papers WP581, Economic and Social Research Institute (ESRI).
    14. Florence Huart, 2013. "Is Fiscal Policy Procyclical in the Euro Area?," German Economic Review, Verein für Socialpolitik, vol. 14(1), pages 73-88, February.
    15. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 5-33, November.
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    17. Christopher Adam & David Cobham, 2009. "Using Real-Time Output Gaps To Examine Past And Future Policy Choices," National Institute Economic Review, National Institute of Economic and Social Research, vol. 210(1), pages 98-110, October.
    18. Roel Beetsma & Benjamin Bluhm & Massimo Giuliodori & Peter Wierts, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," Tinbergen Institute Discussion Papers 11-080/2, Tinbergen Institute.
    19. I. Mammi, 2015. "GMM estimation of fiscal rules: Monte Carlo experiments and empirical tests," Working Papers wp1028, Dipartimento Scienze Economiche, Universita' di Bologna.
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    Keywords

    Fiscal Policy; Real Time Data; Discretion;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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