Fiscal policy adjustments in the euro area stressed countries: new evidence from non-linear models with state-varying thresholds

Roberto De Santis (), Gabriella Legrenzi () and Costas Milas

No 1858, Working Paper Series from European Central Bank

Abstract: We introduce a non-linear model to study the adjustment of fiscal policy variables in Greece, Ireland, Portugal and Spain over the last 50 years, based on endogenously estimated budget deficit-to-GDP thresholds, which vary with fiscal disequilibria, the economic cycle and financial market conditions. We find that the budget deficit-to-GDP thresholds were rather high for Greece and Portugal particularly after 1999 and that the fiscal adjustments in "good" times were very different from the adjustments that took place in "bad" times. We also found that only in Spain fiscal deficits were reduced in expansionary times. Finally, we provide evidence that, under financial market pressure, fiscal authorities relaxed the fiscal deficit-to-GDP threshold for the adjustment in Ireland and Spain and reduced such threshold for the adjustment in Portugal. JEL Classification: H63, H20, H60, C22

Keywords: budgetary disequilibria; European debt crisis; euro periphery; fiscal adjustments; non-linear models (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-eec and nep-fdg
Note: 185689
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20151858

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