On the Cyclicality of Public Finances in Europe |
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Authors: | Mark Hallerberg Rolf Strauch |
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Institution: | (1) Department of Political Science, University of Pittsburgh, 4T23 Posvar Quadrangle, Pittsburgh, PA 15260, USA;(2) Fiscal Policies Division, European Central Bank, Kaiserstr. 29, D-60311 Frankfurt a.M., Germany |
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Abstract: | Under EMU, monetary policy is oriented toward the euro area as a whole and fiscal policy is an important instrument remaining in the hands of national governments to cushion economic shocks to individual countries. The current paper analyses the cyclical pattern of public finances in Europe and addresses the question of whether fiscal policies have been geared towards this stabilising role. Although taxes fluctuate countercyclically in a conventional manner, we find that discretionary measures have tended to undermine automatic stabilisers. On the expenditure side, we find that public investment also displays a consistent procyclical pattern. Dynamic analysis reveals that a permanent shock to output induces asynchronous fluctuations in taxes and expenditures in the year of the shock and in periods thereafter. Finally, we examine political and institutional factors. The political fragmentation of the government as well as the partisan hue of the government do not interfere with the cyclical response of public finances, but we do find evidence of a pronounced electoral cycle. |
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Keywords: | Public finances political economy cyclicality |
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