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Euro area time-varying cyclicality of fiscal policy

Author

Listed:
  • António Afonso
  • Francisco Tiago Carvalho

Abstract

We assess the cyclicality of fiscal policy in the 19 Euro area countries, notably during recessions, for the period 1995-2020. We use a time-varying measure of fiscal cyclicality to describe fiscal policy developments. The results suggest that during recessions discretionary fiscal policy becomes more pro-cyclical, but the overall budget balance becomes more counter-cyclical. Hence, pursuing a Ricardian fiscal regime by more indebted countries leads to higher counter-cyclicality of fiscal policy. Government size reduces counter-cyclicality, as well as trade openness, and financial development has a positive impact on counter-cyclicality.

Suggested Citation

  • António Afonso & Francisco Tiago Carvalho, 2021. "Euro area time-varying cyclicality of fiscal policy," Working Papers REM 2021/0202, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02022021
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Policy; Cyclicality; Time-varying coefficient; Euro area.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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