Fiscal Planning and Implementation: Euro Area Analysis Based on Real Time Data

Maritta Paloviita

Abstract


The aim of this study is to explore discretionary fiscal policies in the euro area during the
time of monetary union (EMU). Ex ante budget plans and policy changes during budget
implementation are investigated using real time data from the OECD Economic Outlook
publications. The particular focus of the study is on fiscal adjustment to the recent financial
crisis and the subsequent global recession. Estimated fiscal policy reaction functions indicate
that in the EMU period ex ante fiscal plans have basically been long-term oriented and
counter-cyclical in the euro area. In the course of the budgetary year, policies have typically
been adjusted due to data revisions and new business cycle information. The crisis had a clear
impact on discretionary policies. The periphery countries clearly adjusted their policies
already in the budgetary planning stage, but other countries mainly reacted to the crisis
during budget implementation. We provide evidence that short-term counter-cyclical fiscal
policies may not have been consistent with sound and sustainable public finances.


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DOI: http://dx.doi.org/10.5296/rae.v6i1.4515

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