- Fiscal adjustment to cyclical developments in the OECD: an empirical analysis based on real-time data
- Oxford Economic Papers
- Volume | Issue number
- 62 | 3
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Using real-time data, we explore the determinants of both fiscal plans and their implementation for OECD countries over the period 1995-2006. First, based on forecasts we estimate standard fiscal rules. Then, we explore how fiscal policy responds to new information, especially on the business cycle. There are marked differences in behaviour between the planning and implementation stages, as well as between the fiscal policy of EU countries and other OECD countries. Planned fiscal policy is a-cyclical for EU countries and counter-cyclical for the other countries. However, in the implementation stage, the EU countries react pro-cyclically to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. Hence, the empirical distinction between the two fiscal stages is crucial, while the relatively strong emphasis on ex ante, as opposed to ex post, compliance with fiscal rules (such as Europe’s Stability and Convergence Programs) seems misguided.
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