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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