Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions for the Euro Area

Karsten Staehr (), Olegs Tkacevs and Katri Urke

No wp2023-3, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper estimates fiscal reaction functions to examine the importance of inflation and inflation surprises for fiscal outcomes in the euro area countries, covering the first 12 countries to join the euro area. The effect of HICP inflation on the primary fiscal balance in per cent of GDP is positive, and statistically and economically significant. The positive effect stems from both the revenue side, particularly direct taxes and indirect taxes, and the expenditure side, particularly primary current expenditures. The effects of HICP inflation on the primary balance and other fiscal outcomes appear in large part to stem from inflation surprises, which are errors in the inflation forecasts available for preparing budgets. The positive effect on the primary fiscal balance does not exhibit noticeable non-linearities.

Keywords: public finances; fiscal outcome; inflation; inflation surprises (search for similar items in EconPapers)
JEL-codes: E31 H6 H62 H68 (search for similar items in EconPapers)
Date: 2023-06-20, Revised 2023-06-20
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Related works:
Journal Article: Fiscal performance under inflation and inflation surprises: evidence from fiscal reaction functions for the euro area (2024)
Working Paper: Fiscal Performance under Inflation and Inflation Surprises: Evidence from Fiscal Reaction Functions for the Euro Area (2023)
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