FISCAL POLICIES AND BUSINESS CYCLES IN AN ENLARGED EURO AREA Karsten Staehr*   Working Papers of Eesti Pank No 3/2007

This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995-2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Autonomous fiscal policy has little or no effect on cyclical variability in either of the two groups of countries. Counter-cyclical fiscal policy appears to be effective in Central and Eastern European countries, but largely ineffective in eurozone countries.
JEL Code: E62, E63, E32
Key words: fiscal policy determinants, fiscal policy effects, eurozone expansion

* The author would like to thank David Mayes, Egle Tafenau and numerous colleagues at the Estonian Central Bank for useful comments and suggestions. The author has also benefited from comments by the discussant, Evzen Kocenda, and other workshop participants at the CESifo workshop "Euro-Area Enlargement", 24 November 2006. All remaining errors and omissions are the responsibility of the author.

Author's e-mail address: karsten.staehr@epbe.ee; karsten.staehr@ut.ee

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

Contents

1. Introduction

2. Fiscal policies in current and future eurozone countries

3. The cyclical reaction of fiscal policy

3.1. Inertia and cyclicality

3.2. Debt, interest payments

3.3. Sample split and structural change

3.4. Expenditure and revenue reactions

4. The impact of fiscal policy on output variability

5. Final comments

References

Appendix A. Variable labels and sources

Appendix B. The general government budget balance in 27 European countries, % of GDP

Fiscal Policies and Business Cycles in an Enlarged Euro Area, Working Papers of Eesti Pank No 3/2007 (PDF*)

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