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Ex-post and real-time estimations of the output gap: A new assessment of fiscal procyclicality in the eurozone

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  • Carnazza, Giovanni

Abstract

The revisions implemented twice a year by the European Commission significantly change not only the forecasts but also the past values of the output gap. Consequently, many possible time series exist. Based on a new approach for estimating a real-time definition of the business cycle, we develop a comparative framework between ex-post and real-time variables using dynamic panel data models with FE, GLS and AB estimators. The real-time version of the output gap solves the important endogeneity issue between the budget balance and the output gap. Considering the period from 1995 to 2021 and the 19 Eurozone countries, our analysis deepens the cyclical nature of fiscal policy, pointing to robust procyclicality. Regardless of the specification, fiscal policy was found to be procyclical, but real-time and ex-post estimates have shown some interesting discrepancies (i.e., on a real-time basis, discretionary budgetary decisions have never been significantly expansionary, and the likely positive effects of automatic stabilisers during economic downturns have been weakened by spending reductions and/or revenue increases). Our findings may help the future reform of the Stability and Growth Pact.

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  • Carnazza, Giovanni, 2023. "Ex-post and real-time estimations of the output gap: A new assessment of fiscal procyclicality in the eurozone," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    • Handle: RePEc:eee:joecas:v:28:y:2023:i:c:s1703494923000440
    DOI: 10.1016/j.jeca.2023.e00332
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    Cited by:

    1. Giovanni Carnazza & Emilio Carnevali, 2024. "Days of future past? The reform of the European fiscal framework, the (enduring) role of the structural balance and the pro-cyclical bias of potential GDP endogeneity," Discussion Papers 2024/306, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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    More about this item

    Keywords

    Fiscal policy; Procyclicality; Output gap; Real-time analysis; Eurozone countries;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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