The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain

Antonio Afonso and Peter Claeys

No 2006/26, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability.

Keywords: fiscal indicator; structural balance; output gap; SGP; EMU; SVAR; short and longterm restrictions. (search for similar items in EconPapers)
JEL-codes: E62 E65 E66 H61 H62 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
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:ise:isegwp:wp262006

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More papers in Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa Department of Economics, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL.
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