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Cyclical sensitivity of fiscal policies based on real-time data

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  • Forni, Lorenzo
  • Momigliano, Sandro

Abstract

This paper examines the information-related problems associated with the analysis of fiscal policies, an issue recently studied in connection with monetary policies but largely ignored in the literature on budgetary action. We estimate a fiscal policy rule for the EU and OECD countries using real-time data on cyclical conditions; the results indicate that over the last decade fiscal policies reacted strongly and counter-cyclically to adverse macroeconomic conditions. Using ex post data instead, the reaction to adverse cyclical conditions is weaker and not statistically significant. The results indicate that reliance on the information actually available to policy-makers in real-time is important for the assessment of past policies, as ex post revised data may provide a misleading basis for such analysis. The results also suggest that part of the problems the Stability and Growth Pact encountered may have come from a misjudgment of cyclical conditions in some European countries in recent years.

Suggested Citation

  • Forni, Lorenzo & Momigliano, Sandro, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," MPRA Paper 4315, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:4315
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    References listed on IDEAS

    as
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    8. Rünstler, Gerhard, 2002. "The information content of real-time output gap estimates, an application to the euro area," Working Paper Series 182, European Central Bank.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Real-time information; OECD countries; stabilization policies; fiscal policy rules;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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