Fiscal rules, inertia and discretionary fiscal policy

Martin Larch and Matteo Salto

No 194, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: In current practice, changes in the cyclically-adjusted budget balance (CAB) are generally interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, and, in some cases, it may even conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion, even in the absence of discretionary measures.

Keywords: fiscal policy; cyclically-adjusted budget balance; potential output; forecast accuracy; policy inaction; Larch; Salto (search for similar items in EconPapers)
Pages: 21 pages
Date: 2003-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://ec.europa.eu/economy_finance/publications/pages/publication831_en.pdf (application/pdf)

Related works:
Journal Article: Fiscal rules, inertia and discretionary fiscal policy (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0194

Access Statistics for this paper

More papers in European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().