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How DiD EU’s fiscal policymakers behave under the Excessive Deficit Procedure

Author

Listed:
  • Frane Banić

    (Croatian National Bank, Croatia)

  • Ivan Žilić

    (Croatian National Bank, Croatia)

Abstract

This paper estimates the effect of Excessive Deficit Procedure (EDP) on fiscal consolidation for EU member states between 2005 and 2019. Using the quarterly data which enables more time granularity and the recent advances in the difference-in-difference literature which allow for differently timed, non-absorbing treatments with dynamic effects, we estimate the causal effect of EDP on cyclically adjusted primary balance. Our findings point to a strong fiscal consolidation effect in the EU under the EDP, measuring to 1.69 percentage point improvement in fiscal stance. While the improvement of fiscal stance under the EDP acted as a counter-cyclical measure during economic expansion, we descriptively show that fiscal consolidation due to the EDP directed policymakers towards a restrictive pro-cyclical stance, especially during the global financial crisis. Finally, we contextualize these findings within the new EU’s fiscal rules, which emphasize the medium-term fiscal adjustment.

Suggested Citation

  • Frane Banić & Ivan Žilić, 2024. "How DiD EU’s fiscal policymakers behave under the Excessive Deficit Procedure," Working Papers 74, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:wpaper:74
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    File URL: http://www.hnb.hr/repec/hnb/wpaper/pdf/w-074.pdf
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    References listed on IDEAS

    as
    1. De Jong, Jasper F.M. & Gilbert, Niels D., 2020. "Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure," European Journal of Political Economy, Elsevier, vol. 61(C).
    2. Clément de Chaisemartin & Xavier D’Haultfœuille, 2023. "Two-way fixed effects and differences-in-differences with heterogeneous treatment effects: a survey," The Econometrics Journal, Royal Economic Society, vol. 26(3), pages 1-30.
    3. Gilles Mourre & Aurélien Poissonnier, 2019. "What Drives the Responsiveness of the Budget Balance to the Business Cycle in EU Countries?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 54(4), pages 237-249, July.
    4. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    5. Gootjes, Bram & de Haan, Jakob, 2022. "Procyclicality of fiscal policy in European Union countries," Journal of International Money and Finance, Elsevier, vol. 120(C).
    6. Mr. Luc Eyraud & Vitor Gaspar & Mr. Tigran Poghosyan, 2017. "Fiscal Politics in the Euro Area," IMF Working Papers 2017/018, International Monetary Fund.
    7. Herrero-Alcalde, Ana & Martín-Román, Javier & Tránchez-Martín, José Manuel & Moral-Arce, Ignacio, 2024. "Fiscal rules to the test: The impact of the Spanish expenditure rule," European Journal of Political Economy, Elsevier, vol. 81(C).
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    More about this item

    Keywords

    Excessive Deficit Procedure; fiscal consolidation; difference-in-difference;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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