No. 540 - Cyclical sensitivity of fiscal policies based on real-time data

This paper examines the information-related problems associated with the analysis of fiscal policies, an issue recently studied in connection with monetary policies but largely ignored in the literature on budgetary action. We estimate a fiscal policy rule for the EU and OECD countries using real-time data on cyclical conditions; the results indicate that over the last decade fiscal policies reacted counter-cyclically to adverse macroeconomic conditions. Using ex post data instead, the estimated reaction to adverse cyclical conditions is weaker and not statistically significant. The results indicate that reliance on the information actually available to policy-makers in real-time is important for the assessment of past policies; they also suggest that part of the problems the Stability and Growth Pact encountered may have come from a misjudgement of cyclical conditions in some European countries.