How DiD EU’s fiscal policymakers behave under the Excessive Deficit Procedure

Frane Banić and Ivan Žilić ()
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Ivan Žilić: Croatian National Bank, Croatia

No 74, Working Papers from The Croatian National Bank, Croatia

Abstract: This paper estimates the effect of Excessive Deficit Procedure (EDP) on fiscal consolidation for EU member states between 2005 and 2019. Using the quarterly data which enables more time granularity and the recent advances in the difference-in-difference literature which allow for differently timed, non-absorbing treatments with dynamic effects, we estimate the causal effect of EDP on cyclically adjusted primary balance. Our findings point to a strong fiscal consolidation effect in the EU under the EDP, measuring to 1.69 percentage point improvement in fiscal stance. While the improvement of fiscal stance under the EDP acted as a counter-cyclical measure during economic expansion, we descriptively show that fiscal consolidation due to the EDP directed policymakers towards a restrictive pro-cyclical stance, especially during the global financial crisis. Finally, we contextualize these findings within the new EU’s fiscal rules, which emphasize the medium-term fiscal adjustment.

Keywords: Excessive Deficit Procedure; fiscal consolidation; difference-in-difference (search for similar items in EconPapers)
JEL-codes: F62 H30 H60 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2024-10-08
New Economics Papers: this item is included in nep-eec and nep-pbe
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