Research Discussion Papers, Bank of Finland
No 34/2012:
Fiscal planning and implementation: euro area analysis based on real time data
Maritta Paloviita ()
Abstract: This study explores 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 in the euro area have
basically been long-term oriented and counter-cyclical. 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. In order to maintain
fiscal discipline and avoid excessive indebtedness, careful monitoring of
macroeconomic imbalances and reliable as well as more accurate forecasts
are needed. Overall, longer term fiscal policy orientation and continuous
monitoring of the budgeting processes are crucial in good fiscal
governance.
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)
24 pages, November 21, 2012
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