A time-varying approach to assessing fiscal cyclicality: The impact of the European fiscal framework

Giovanni Carnazza and Francesco Tomasone

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: This paper offers new empirical insights into the relationship between the European fiscal framework and the cyclical stance of fiscal policy in EMU countries. By employing a Time-Varying Coefficient (TVC) model, we generate country- and year-specific measures of fiscal cyclicality from 1995 to 2019. We then quantify the evolving intensity of fiscal rules through a country- and year-specific composite index and assess its impact on fiscal cyclicality via panel regressions with multiple estimators, including a robust IV-GMM specification that addresses endogeneity concerns. This dual-framework strategy enables us to capture the distortion introduced by real-time revisions and identify a significant pro-cyclical bias in peripheral countries, which is largely masked when expost data are used. In other words, our findings reveal a marked asymmetry: while the effect of fiscal rules on cyclicality is neutral or mildly counter-cyclical in core countries, it is significantly pro-cyclical in peripheral ones when real-time data are considered. These results have important implications for the revised European fiscal framework, as the new indicator – net expenditure – continues to rely on cycle-sensitive variables and therefore risk perpetuating the same structural biases. Our analysis calls for a deeper reconsideration of the methodology used to estimate potential output in the EU. By demonstrating how the interaction between fiscal rules and real-time macroeconomic estimates can generate unintended policy outcomes, this study contributes to a more informed debate on the future of fiscal governance in the euro area.

Keywords: Fiscal cyclicality; European fiscal framework; Output gap; NAWRU; Expost and real-time data; Time-Varying Coefficient models (search for similar items in EconPapers)
JEL-codes: C33 E32 E62 F45 H62 (search for similar items in EconPapers)
Date: 2025-08-01
New Economics Papers: this item is included in nep-eec
Note: ISSN 2039-1854
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Persistent link: https://EconPapers.repec.org/RePEc:pie:dsedps:2025/324

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