Fiscal Prudence: It’s All in the Timing – Estimating Time-Varying Fiscal Policy Reaction Functions for Core EU Countries

Abstract The aim of this article is an extensive presentation of the fiscal policy conducted by the EU states in the years 2008–2015. The analysis concerns the legal regulations introduced at the EU level by the European Parliament and the Council, as well as the fiscal policies of governments of particular states. The first part of the article analyzes basic macroeconomic data in EU states concerning the level of debt, the level of gross domestic product (GDP) redistribution, and the level of economic growth in the analyzed period. The second part discusses the legal acts adopted by the European Parliament and the Council (the so-called ‘sixpack’ and the European Fiscal Compact), aimed at improving macroeconomic balance and ensuring supervision over the proper functioning of national finances. The third part analyzes the discretionary fiscal policies pursued in EU states. The main conclusions of this article are as follows: (i) EU countries recorded higher national debt levels and debt growth rates between 2008 and 2015 than most non-EU Organisation for Economic Co-operation and Development (OECD) countries; (ii) despite legal measures taken by the European Council and the European Commission in the form of the sixpack and the European Fiscal Compact, and despite discretionary fiscal measures such as in the form of the European Economic Recovery Plan, five EU countries (Cyprus, Greece, Italy, Portugal, and Spain) have experienced a steady increase in their national debt levels; and (iii) deep reforms in the composition and level of government expenditure are a prerequisite for reducing national debt levels and for achieving satisfactory economic growth in these countries.

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The sustainability of Swedish fiscal policy: a re-examination

Journal of Economics and Development ◽

10.1108/jed-04-2020-0045 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Arcade Ndoricimpa

Keyword(s):

Fiscal Policy ◽

Regression Model ◽

Structural Changes ◽

Cointegration Test ◽

Time Varying ◽

Fiscal Deficits ◽

Slope Coefficient ◽

Content Type ◽

Multiple Structural Changes ◽

Sustainability Of Fiscal Policy

PurposeThis study reexamines the sustainability of fiscal policy in Sweden.Design/methodology/approachTo test the sustainability of fiscal policy, two approaches are used; the methodology of Kejriwal and Perron (2010), testing for multiple structural changes in a cointegrated regression model and time-varying cointegration test of Bierens and Martins (2010), and Martins (2015).FindingsUsing the first approach of testing for multiple structural changes in a cointegrated regression model, the results indicate that government spending and revenue are cointegrated with two breaks. An estimation of a two-break long-run model shows that the slope coefficient increases from 0.678 to 0.892 from the first to the second regime, implying that fiscal deficits were weakly sustainable in the first two regimes, from 1800 to 1943, and from 1944 to 1974. Further, results from time-varying cointegration test indicate that cointegration between spending and revenue in Sweden is time-varying. Fiscal deficits were found to be unsustainable for the periods 1801–1811, 1831–1838, 1853–1860 , 1872–1882, 1897–1902, 1929–1940 and 1976–1982 and weakly sustainable over the rest of the study period.Research limitations/implicationsA number of implications arise from this study: (1) Accounting for breaks in cointegration analysis and in the estimation of the level relationship between spending and revenue is very important because ignoring breaks may lead to an overestimated slope coefficient and hence a bias on the magnitude of fiscal deficit sustainability. (2) In testing for cointegration between spending and revenue, assuming a constant cointegrating slope when it is actually time-varying can also be misleading because deficits can be sustainable for a period of time and unsustainable over another period.Originality/valueThe contribution of this study is three-fold; first, the study uses a long series of annual data spanning over a period of two centuries, from 1800 to 2011. Second, because of the importance of structural change in economics, to examine the existence of a level relationship between spending and revenue, the study uses the methodology of Kejriwal and Perron (2010) to test for multiple structural changes in a cointegrated regression model, as well as time-varying cointegration of Bierens and Martins (2010) and Martins (2015).

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FISCAL POLICY PERFORMANCE ASSESSMENT IN THE CONTEXT OF NATIONAL COMPETITIVENESS, CASES OF EU COUNTRIES

ECONOMICS AND MANAGEMENT ◽

10.5755/j01.em.17.2.2172 ◽

2012 ◽

Vol 17 (2) ◽

Author(s):

Asta Vasiliauskaite ◽

Evaldas Stankevicius

Keyword(s):

Fiscal Policy ◽

Performance Assessment ◽

Eu Countries ◽

Policy Performance ◽

National Competitiveness

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A time-varying approach to analysing fiscal policy and asset prices in South Africa

Journal of Financial Economic Policy ◽

10.1108/jfep-01-2013-0003 ◽

2014 ◽

Vol 6 (1) ◽

pp. 46-63 ◽

Cited By ~ 5

Author(s):

Rangan Gupta ◽

Charl Jooste ◽

Kanyane Matlou

Keyword(s):

Fiscal Policy ◽

Stock Prices ◽

Asset Prices ◽

Marked Change ◽

Var Model ◽

Time Varying ◽

Content Type ◽

Vector Autoregressive ◽

Time Varying Parameter ◽

The Impact

Purpose – This paper aims to study the interplay of fiscal policy and asset prices in a time-varying fashion. Design/methodology/approach – Using South African data since 1966, the authors are able to study the dynamic shocks of both fiscal policy and asset prices on asset prices and fiscal policy based on a time-varying parameter vector autoregressive (TVP-VAR) model. This enables the authors to isolate specific periods in time to understand the size and sign of the shocks. Findings – The results seem to suggest that at least two regimes exist in which expansionary fiscal policy affected asset prices. From the 1970s until 1990, fiscal expansions were associated with declining house and slightly increased stock prices. The majority of the first decade of 2000 had asset prices increasing when fiscal policy expanded. On the other hand, increasing asset prices reduced deficits for the majority of the sample period, while the recent financial crises had a marked change on the way asset prices affect fiscal policy. Originality/value – This is the first attempt in the literature of fiscal policy and asset prices to use a TVP-VAR model to not only analyse the impact of fiscal policy on asset prices, but also the feedback from asset prices to fiscal policy over time.

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A NOTE ON TIME VARIATION IN A FORWARD-LOOKING MONETARY POLICY RULE: EVIDENCE FROM EUROPEAN COUNTRIES

Macroeconomic Dynamics ◽

10.1017/s1365100510000866 ◽

2012 ◽

Vol 16 (S3) ◽

pp. 422-437 ◽

Cited By ~ 10

Author(s):

N. Kundan Kishor

Keyword(s):

Monetary Policy ◽

Time Variation ◽

Monetary Economics ◽

Time Varying ◽

Reaction Functions ◽

The United Kingdom ◽

Expected Inflation ◽

Time Varying Parameter ◽

Monetary Policy Reaction Functions ◽

Forward Looking

This paper estimates time-varying forward-looking monetary policy reaction functions for the central banks of France, Germany, Italy, and the United Kingdom. We utilize the framework developed by Kim [Economics Letters91 (2006) 21–26] and Kim and Nelson [Journal of Monetary Economics(2006) 1949–1966] to deal with the issue of endogeneity in a time varying–parameter model. Our results find substantial time variation in the conduct of monetary policy in these four countries, which cannot be adequately captured by the conventional fixed-coefficient approach. Our findings suggest that there was a significant decline in the Bank of France's and the Bank of Italy's response to the German interest rate in 1992, and it coincided with the breakdown of the exchange rate management system in Europe. Our results suggest that the Bank of England was slower than the Bundesbank to increase its response to expected inflation, as its response to inflation became more than one-for-one only in the early 1980s.

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