Fiscal Reaction Functions for European Union Countries

Katia Berti, Eugeniu Colesnic, Cyril Desponts, Stephanie Pamies and Etienne Sail

No 28, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper estimates country-specific fiscal reaction functions (FRFs) for selected European countries and tests for a change in fiscal behaviour since the beginning of the economic and financial crisis. The estimated country-specific FRFs, as well as a panel FRF for Central and Eastern European countries, are used in medium-term projections of the public debt-to-GDP ratio. Additional results in terms of fiscal risk assessment based on this FRF debt projection scenario and on the degree of realism of fiscal projections underlying public debt projections are also derived. Most EU countries are found to positively adjust their fiscal policy to rising levels of public debt, although to a weak extent in some cases. Since 2009, fiscal responsiveness to public debt appears to have generally increased over the sub-sample of EU countries considered. When using FRFs to project public debt ratios, results are on average less favourable than under the standard baseline no-fiscal policy change scenario used by the Commission services. However, for most countries, results generally corroborate the summary medium-term sustainability risk assessment made by the European Commission services (2016) based on more traditional debt projection scenarios and sensitivity tests. The paper also identifies a set of countries that are potentially at risk of fiscal fatigue.

JEL-codes: C22 C23 E62 H68 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2016-04
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:028

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