Hooverism, hyperstabilisation or halfway-house? describing fiscal policy in Estonia 1996-2003

Rasmus Kattai () and John Lewis

No 2004-04, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.

Keywords: Fiscal Policy; Fiscal Policy Rules; New EU Member States (search for similar items in EconPapers)
JEL-codes: E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-tra
Date: 2004-10-10, Revised 2004-10-10
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