Fiscal policy in Central and Eastern Europe with real time data: cyclicality, inertia and the role of EU accession

John Lewis

Applied Economics, 2013, vol. 45, issue 23, 3347-3359

Abstract: This article evaluates the cyclicality, inertia and effect of EU accession on fiscal policy in Central and Eastern Europe (CEE) using a real time dataset. Budget balances are found to react in a stabilizing way to economic activity -- every extra percentage point of economic growth is associated with an improvement in the budget balance of 0.3 percentage points of Gross Domestic Product (GDP) -- and there is no evidence of an asymmetric reaction to the cycle. Balances are much less inert than is typically found in Western Europe. However, there is clear evidence of a fiscal loosening in the run-up to EU accession. This began in 1999 in larger central European countries, often identified as ‘front-runners’. The other seven began loosening in 2001, after the Nice Treaty was agreed. For both sets of countries, this loosening cumulatively amounts to some 3% of GDP.

Date: 2013
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DOI: 10.1080/00036846.2012.705428

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