HOOVERISM, HYPERSTABILISATION OR HALFWAY-HOUSE? DESCRIBING FISCAL POLICY IN CENTRAL AND EASTERN EUROPEAN EU MEMBERS Rasmus Kattai John Lewis November 2004 Working Papers of Eesti Pank No 5, 2005

This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.
JEL Code: E61, E62
Key words: Fiscal Policy, Fiscal Policy Rules, New EU Member States

Author's e-mail addresses: rasmus.kattai@epbe.ee, jlewis@epbe.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction

2. Deriving a Simple Fiscal Policy Measure

2.1. Hooverism

2.2. Hyperstabilisation

2.3. Halfway-House

2.4. Graphical Analysis

2.5. Other Objectives for Fiscal Policy

3. Analysing Fiscal Policy Empirically

3.1. Estimation Procedure

3.2. Results

4. Conclusions

Hooverism, Hyperstabilisation or Halfway-House? Describing Fiscal Policy in Central and Eastern European EU Members, Working Papers of Eesti Pank No 5, 2005 (PDF*)

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