Fiscal discretion, growth and output volatility in new EU member countries

This paper analyses the link between discretionary fiscal policy and output growth in ten CEE countries. Three aspects are considered: cyclical pattern in the fiscal discretion, contributions to GDP growth, and the link between policy aggressiveness and output volatility. Fiscal discretion is estimated from quarterly data over 2000q1 to 2014q1 using a SVAR model in GDP, net taxes and spending. Decomposition of the GDP suggests that fiscal discretion induced rather small contributions to economic growth. Correlation between fiscal policy aggressiveness and output volatility is weak to moderate positive, notwithstanding whether spending or balance is used as the underlying indicator. The cyclical pattern has identified a mix of pro- and counter-cyclical episodes in the years before the crisis, implying that governments might not have consistently used the good times to create buffers. Overall, this evidence supports the view that policy makers in the CEE countries should mainly rely on rule-based fiscal policy rather than (aggressive) fiscal discretion

Effects of fiscal shocks in new EU members estimated from a SVARX model with debt feedback

This paper analyses in a VAR framework with debt feedback effects of fiscal policy over 1999q1-2013q4 in five Central and East European economies: Slovakia, Czech republic, Hungary, Slovenia and Lithuania. The results are compared to two alternative specifications, a model without debt feedback, and a model with debt within the linear VAR. Omitting the debt feedback would affect the magnitude and sign of the impulse response coefficients, especially those of GDP, government revenue and interest rate. Simulated out-of-sample debt paths are stabilised if debt feedback is included, but strongly explosive otherwise

Discretion versus rule-based fiscal policy in new EU economies

This paper aims to evaluate fiscal policy as a macroeconomic stabilization tool in the new EU member countries using a vector autoregression (VAR) framework. The combined results of the analysis of impulse response functions and of the aggressiveness of fiscal discretion suggest that: 1. Shocks to government expenditures and revenues yield rather minor stimulating effects on output. 2. Periods with higher output growth tend to be linked with more loosened systematic policy levels. 3. There is evidence that higher output volatility is associated with the aggressive use of fiscal policy, whilst fiscal discretion does not seem to stimulate lasting output growth. Overall, this evidence together with the increased debt financing risks of these emerging economies favours the use of rules-based fiscal policy rather than (aggressive) fiscal discretion.Fiscal policy, NMS, VAR model, Fiscal policy aggressiveness

Are there political fiscal cycles in NMS?

It is a generally documented fact that political cycles are a phenomenon of new democracies. In this paper we deepen the evidence for the new EU member countries that are a prominent example of recently established democratic systems. We show that, in line with the opportunistic theory, primary balances tended to deteriorate in the years of elections, if taking NMS ’en bloc’. This was mainly driven by the cycle in government expenditures. However, careful cross-country and cross-time analysis challenges the general view. It turns out that the political cycle cannot be attributed to all new European democracies, in particular, not to those that made long-run attempts to integrate into EMU. Moreover, we document that with the time passing, opportunism has evaporated from the overall sample of the NMS. This comes from the fact that the political cycle has diminished in countries that were prone to opportunistic manipulation in the initial period.Fiscal policy, Opportunistic cycle, Business cycle, Government expenditures, NMS, CEE countries

Output and price behaviour in a system dynamics model

This paper introduces a small-scale experimental model intended as a first stage to developing a fully-fledged system dynamics macroeconomic model of a new generation. The model economy incorporates important real-world features that are missing in the mainstream macroeconomic literature. The agents representing the demand and supply side dispose over a limited information set. Their interactions are not constrained by a priori imposition of equilibrium conditions. The exercise shows that, unlike in general equilibrium models, booms and busts in output and price endogenously arise due to the stock variable representation of demand and supply and modelling the agents’ decisions as autonomous. It is also demonstrated that bad times and good times are driven by the same causal mechanisms. The insights are paramount for an appropriate understanding of the true possibilities of macroeconomic policies and provide fruitful material for further exploration.System dynamics, Stock variables, Disequilibrium model, Bounded rationality, Backward looking solution