IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20091118.html
   My bibliography  Save this paper

Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach

Author

Listed:
  • Agnello, Luca
  • Cimadomo, Jacopo

Abstract

This paper explores how discretionary fiscal policies on the revenue side of the government budget have reacted to economic fluctuations in European Union countries. For this purpose, it uses data on legislated revenue changes and structural indicators provided twice per year by National Central Banks of European Union countries in the ESCB framework for analysing fiscal policy. The analysis is based on the estimation of fiscal policy rules linking these measures of legislated fiscal policy changes to the output gap and other control variables. Then, baseline results are compared with regression estimates where variations of cyclically-adjusted indicators are used as proxy for discretionary fiscal policies, as conventionally proposed in the empirical literature on fiscal policy. Results suggest that, overall, legislated changes in taxes and social security contributions have responded in a strongly pro-cyclical way to the business cycle, while commonly-used cyclical-adjustment methods point to a-cyclicality. JEL Classification: E62, E65, H20

Suggested Citation

  • Agnello, Luca & Cimadomo, Jacopo, 2009. "Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach," Working Paper Series 1118, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091118
    Note: 1145200
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1118.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Felix Eschenbach & Ludger Schuknecht, 2004. "Budgetary risks from real estate and stock markets [‘Kapitalvinster, hushållens konsumtion och sparande’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 19(39), pages 314-346.
    2. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    3. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union [‘Constitutions, politics, and economics’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(54), pages 298-362.
    4. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1419-1447.
    5. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
    6. Antonio Fatás & Ilian Mihov, 2010. "The Euro and Fiscal Policy," NBER Chapters, in: Europe and the Euro, pages 287-324, National Bureau of Economic Research, Inc.
    7. Carlo A. Favero, "undated". "How do European monetary and fiscal authorities behave?," Working Papers 214, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
    9. António Afonso & Luca Agnello & Davide Furceri, 2010. "Fiscal policy responsiveness, persistence, and discretion," Public Choice, Springer, vol. 145(3), pages 503-530, December.
    10. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    11. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May.
    12. Kremer, Jana & Rodrigues Braz, Cláudia & Brosens, Teunis & Langenus, Geert & Momigliano, Sandro & Spolander, Mikko, 2006. "A disaggregated framework for the analysis of structural developments in public finances," Working Paper Series 579, European Central Bank.
    13. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May.
    14. Julia Darby & Jacques Melitz, 2008. "Social spending and automatic stabilizers in the OECD [‘Real-time output gaps in ex post policy analysis: A red herring?’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 716-756.
    15. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    16. Charles Wyplosz, 2006. "European Monetary Union: the dark sides of a major success [‘The macroeconomics of low inflation’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(46), pages 208-261.
    17. Alan J. Auerbach, 2002. "Is there a role for discretionary fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 109-150.
    18. Francesco Giavazzi & Marco Pagano, 1995. "Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience," NBER Working Papers 5332, National Bureau of Economic Research, Inc.
    19. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2010. "Cross-Border Spillovers from Fiscal Stimulus," International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 5-37, March.
    20. Albert Jaeger & Ludger Schuknecht, 2007. "Boom-Bust Phases in Asset Prices and Fiscal Policy Behavior," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(6), pages 45-66, November.
    21. Forni, Lorenzo & Momigliano, Sandro, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," MPRA Paper 4315, University Library of Munich, Germany.
    22. Martin Larch & Matteo Salto, 2005. "Fiscal rules, inertia and discretionary fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 37(10), pages 1135-1146.
    23. 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 77, European Central Bank.
    24. Giuliodori, Massimo & Beetsma, Roel, 2008. "On the relationship between fiscal plans in the European Union: An empirical analysis based on real-time data," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 221-242, June.
    25. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
    26. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72, National Bureau of Economic Research, Inc.
    27. Roel Beetsma & Massimo Giuliodori, 2010. "Fiscal adjustment to cyclical developments in the OECD: an empirical analysis based on real-time data," Oxford Economic Papers, Oxford University Press, vol. 62(3), pages 419-441, July.
    28. Roberto Golinelli & Sandro Momigliano, 2008. "The cyclical response of fiscal policies in the euro area. Why do results of empirical research differ so strongly?," Temi di discussione (Economic working papers) 654, Bank of Italy, Economic Research and International Relations Area.
    29. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
    30. Mr. Nigel A Chalk, 2002. "Structural Balances and All That: Which Indicators to Use in Assessing Fiscal Policy," IMF Working Papers 2002/101, International Monetary Fund.
    31. F. Ballabriga & C. Martinez-Mongay, 2002. "Has EMU shifted policy?," European Economy - Economic Papers 2008 - 2015 166, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    32. Larch, Martin & Turrini, Alessandro, 2009. "The Cyclically Adjusted Budget Balance in EU Fiscal Policymaking. Love at First Sight Turned into a Mature Relationship," MPRA Paper 20594, University Library of Munich, Germany.
    33. Golinelli, Roberto & Momigliano, Sandro, 2006. "Real-time determinants of fiscal policies in the euro area," Journal of Policy Modeling, Elsevier, vol. 28(9), pages 943-964, December.
    34. Alessandro Turrini, 2008. "Fiscal policy and the cycle in the Euro Area: The role of government revenue and expenditure," European Economy - Economic Papers 2008 - 2015 323, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    35. Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe [‘Consumption smoothing through fiscal policy in OECD and EU countries’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 533-572.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heimberger, Philipp, 2023. "The cyclical behaviour of fiscal policy: A meta-analysis," Economic Modelling, Elsevier, vol. 123(C).
    2. Bénétrix, Agustín S. & Lane, Philip R., 2013. "Fiscal cyclicality and EMU," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 164-176.
    3. Roberto Golinelli & Sandro Momigliano, 2009. "The Cyclical Reaction of Fiscal Policies in the Euro Area: The Role of Modelling Choices and Data Vintages," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 39-72, March.
    4. Aurel IANCU & Dan Constantin OLTEANU, 2022. "Procyclical and Countercyclical Fiscal Policies in Non-Euro EU Member Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 188-205, October.
    5. Combes, Jean-Louis & Minea, Alexandru & Sow, Moussé, 2017. "Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules," Economic Modelling, Elsevier, vol. 65(C), pages 138-146.
    6. Huart Florence, 2013. "Is Fiscal Policy Procyclical in the Euro Area?," German Economic Review, De Gruyter, vol. 14(1), pages 73-88, February.
    7. Julia Darby & Jacques Melitz, 2011. "Joint Estimates of Automatic and Discretionary Fiscal Policy: the OECD 1981-2003," Working Papers 2011-14, CEPII research center.
    8. Bernoth, Kerstin & Hughes Hallett, Andrew & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
    9. Julia Darby & Jacques Melitz, 2011. "Joint estimates of automatic and discretionary fiscal policy for the OECD," Working Papers 1122, University of Strathclyde Business School, Department of Economics.
    10. Larch, Martin & Orseau, Eloïse & van der Wielen, Wouter, 2021. "Do EU fiscal rules support or hinder counter-cyclical fiscal policy?," Journal of International Money and Finance, Elsevier, vol. 112(C).
    11. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2023. "A quest between fiscal and market discipline," Economic Modelling, Elsevier, vol. 119(C).
    12. Fabrizio Balassone & Maura Francese & Stefania Zotteri, 2010. "Cyclical asymmetry in fiscal variables in the EU," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 37(4), pages 381-402, November.
    13. Serhan Cevik & Vibha Nanda, 2020. "Riding the storm: fiscal sustainability in the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, vol. 34(3), pages 384-399, May.
    14. 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.
    15. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    16. Alessandro Turrini, 2008. "Fiscal policy and the cycle in the Euro Area: The role of government revenue and expenditure," European Economy - Economic Papers 2008 - 2015 323, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    17. Agust n S. B n trix & Philip R. Lane, 2015. "Financial Cycles and Fiscal Cycles," Trinity Economics Papers tep0815, Trinity College Dublin, Department of Economics.
    18. repec:edn:sirdps:400 is not listed on IDEAS
    19. Roel Beetsma & Massimo Giuliodori, 2010. "Fiscal adjustment to cyclical developments in the OECD: an empirical analysis based on real-time data," Oxford Economic Papers, Oxford University Press, vol. 62(3), pages 419-441, July.
    20. Beetsma, Roel & Giuliodori, Massimo & Wierts, Peter, 2009. "Budgeting versus implementing fiscal policy in the EU," CEPR Discussion Papers 7285, C.E.P.R. Discussion Papers.
    21. Aldama, Pierre & Creel, Jérôme, 2022. "Real-time fiscal policy responses in the OECD from 1997 to 2018: Procyclical but sustainable?," European Journal of Political Economy, Elsevier, vol. 73(C).

    More about this item

    Keywords

    cyclical sensitivity; Discretionary fiscal policies; ESCB disaggregated framework; government revenues; legislation changes; narrative approach;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20091118. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.