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Negative rates, demographics and fiscal policy: Heterogeneous tilting taxation in the Euro Area

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  • Camarero, Mariam
  • Sapena, Juan
  • Tamarit, Cecilio

Abstract

This paper estimates time-varying tax-tilting parameters for eleven EMU member states from 1970 to 2024 using a panel time-varying parameter state-space model that extends the traditional tax-smoothing framework to capture both common and country-specific dynamics. Core countries such as Austria, Belgium, Germany, the Netherlands, France, Ireland, and Finland display a more prudent fiscal stance, while peripheral countries, including Greece, Italy, Portugal, and Spain, shift taxation toward the future, generating current deficits. These patterns are driven by differences between government discounting of future revenues and market rates, and are further influenced by structural factors such as aging populations and unemployment. Periods of negative real interest rates relax fiscal constraints, encouraging governments to delay tax adjustments. The results underscore the need to reduce cross-country fiscal heterogeneity to strengthen long-term sustainability and advance fiscal integration in the Euro Area.

Suggested Citation

  • Camarero, Mariam & Sapena, Juan & Tamarit, Cecilio, 2025. "Negative rates, demographics and fiscal policy: Heterogeneous tilting taxation in the Euro Area," MPRA Paper 125942, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125942
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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