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Bank of Finland Research Discussion Papers, Bank of Finland

No 21/2011:
Real time analysis of euro area fiscal policies: adjustment to the crisis

Maritta Paloviita () and Helvi Kinnunen ()

Abstract: Using real time data from the OECD and fiscal policy reaction functions, this study explores euro area fiscal policies since the late 1990s. Both discretionary plans for the budget year and policy changes during budget implementation stages are investigated. The main focus is on the fiscal adjustment to the recent financial and economic crisis. The results suggest that during the time of monetary union (EMU) euro area planned fiscal policies have been long-term oriented and counter-cyclical. In the implementation stages new policy decisions have been made in response to unexpected economics developments. We provide evidence that the crisis had a clear impact on discretionary policies. Due to the resultant increase in uncertainty, the crisis spotlighted the impact of cyclical developments on fiscal planning. In the implementation stages, huge forecast errors in connection with planned policy were observed. As a consequence, new decisions were made in order to alleviate the negative impacts of the crisis on euro area economies.

Keywords: fiscal policy; real time data; planning stage; implementation stage; cyclical sensitivity; economic crisis; (follow links to similar papers)

JEL-Codes: E32; E62; (follow links to similar papers)

33 pages, October 14, 2011

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