Abstract:Summary
We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for 12 Euro area member states over the 1970‐2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996‐2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government current expenditure and direct taxes. In contrast, in the core member states… Show more
“…This result may reflect heterogeneity of the Euro area, where credibility of core countries could weaken incentives of peripheries to run sustainable fiscal policy, as suggested, e.g. by Afonso et al ( 2014 ) or Ciżkowicz et al ( 2015 ). Fig.…”
The main goal of the paper is to analyse one-dimensional, isolated impact of particular variables which are used in the literature as explanatory variables for risk premium following fiscal tensions. Using Student’s t-tests, supplemented with ANOVA analysis, we study about a hundred likely determinants of the risk premium in 22 OECD countries over 1978–2017. We find that for deeper falls in the risk premium following fiscal tensions, the size of fiscal adjustments matters more than their composition. That said, expenditure-based fiscal adjustments are more effective in lowering the risk premium than tax-based ones. Fiscal adjustments can outweigh the effects of global risk aversion. Otherwise its low level or decline is needed for deep falls in the risk premium, suggesting there are time-breaks in relations between the risk premium and other factors. Supply-side reforms, especially of the labour market, are of help. The risk premium often responds to their very announcements, indicating that fiscal tensions do not necessarily delay payoffs from reform efforts. That said, our results are only of qualitative nature and do not warrant any conclusions as to mechanisms or causality.
Supplementary Information
The online version contains supplementary material available at 10.1007/s10663-022-09532-1.
“…This result may reflect heterogeneity of the Euro area, where credibility of core countries could weaken incentives of peripheries to run sustainable fiscal policy, as suggested, e.g. by Afonso et al ( 2014 ) or Ciżkowicz et al ( 2015 ). Fig.…”
The main goal of the paper is to analyse one-dimensional, isolated impact of particular variables which are used in the literature as explanatory variables for risk premium following fiscal tensions. Using Student’s t-tests, supplemented with ANOVA analysis, we study about a hundred likely determinants of the risk premium in 22 OECD countries over 1978–2017. We find that for deeper falls in the risk premium following fiscal tensions, the size of fiscal adjustments matters more than their composition. That said, expenditure-based fiscal adjustments are more effective in lowering the risk premium than tax-based ones. Fiscal adjustments can outweigh the effects of global risk aversion. Otherwise its low level or decline is needed for deep falls in the risk premium, suggesting there are time-breaks in relations between the risk premium and other factors. Supply-side reforms, especially of the labour market, are of help. The risk premium often responds to their very announcements, indicating that fiscal tensions do not necessarily delay payoffs from reform efforts. That said, our results are only of qualitative nature and do not warrant any conclusions as to mechanisms or causality.
Supplementary Information
The online version contains supplementary material available at 10.1007/s10663-022-09532-1.
“…In this paper, we have analysed the fiscal sustainability in Poland. Unlike previous studies (see e.g., Ciżkowicz et al, 2015), we looked specifically at the fiscal outcomes prior to and after the global financial crisis and the sovereign debt crisis that led to several new institutional measures on the EU and the national level. Moreover, we have analysed the fiscal sustainability in the strong sense (Bohn, 1995, 1998), as compared to previous studies that analysed weak measures of the fiscal sustainability (see e.g., Stanek, 2014).…”
Section: Discussionmentioning
confidence: 99%
“…We approach this question by looking at the evolution of the fiscal sustainability in Poland, which is an interesting case of a member state that during the crisis actively promoted several changes to the EU fiscal framework (e.g., six‐pack) and effectively internalized some of these key changes in its domestic fiscal policy, including a domestic expenditure fiscal rule 1 . Unlike previous studies (see e.g., Ciżkowicz et al, 2015; Krajewski et al, 2016 or Bökemeier, 2017) we take a much closer look at the fiscal sustainability prior and after the global financial crisis. Moreover, as compared to the previous studies that analysed weak measures of fiscal sustainability (see e.g., Stanek, 2014 or Wysocki, 2017), we analyse the fiscal sustainability in a strong sense by using a fiscal response approach, as suggested by Bohn (1995, 1998).…”
In response to the global crisis, a number of new institutional measures have been introduced in the fiscal framework, both on the EU and on the member states' level, and the question is: Have these measures provided better fiscal sustainability outcomes? We approach this question by looking at the evolution of fiscal sustainability in Poland, which is an interesting case of a member state that without significant market pressure (the only EU country without recession during the crisis) actively promoted several changes in the EU fiscal framework (e.g., six‐pack) and effectively internalized some of these key changes in its domestic fiscal policy, including a domestic expenditure fiscal rule. Our analysis reveals that the fiscal sustainability in Poland has significantly improved in the post‐crisis period of 2009–2017: We detect both improvement of the fiscal sustainability parameters and structural breaks in the fiscal outcomes after the crisis. Namely, in comparison to the whole sample of 2004–2017 the strength of reaction of the primary deficit to a change of the public debt increased in the post‐crisis time by nearly 50%. Importantly, these results are robust with respect to the pension fund reform which led to a one‐off redemption of T‐bonds in amount of 8.5% of GDP. The analysis also reveals a cycle of structural breaks of 2‐and 4 years lags: For the output gap in 2008 Q4, for the primary deficit in 2010 Q4 and for the public debt in 2014 Q1. The case of Poland seems to suggest that the post‐crisis EU fiscal measures can be effectively used to increase fiscal sustainability, if properly approached and internalized into the domestic fiscal framework. More research should be devoted to understanding the political and economic conditions under which such positive outcomes were possible.
“…For example, Tujula and Wolswijk (2004) show that in the election years, the fiscal balance tends to be lower than in other years, probably reflecting actions taken by politicians (reduced taxes and increased spending) to increase their chances of staying in the office. Among other factors included are current account balance to account for the "twin deficit" effect (Cizkowicz et al, 2015), commodity prices (Mauro et al, 2015) as well as VIX index controlling for short-term uncertainty (Debrun and Kinda, 2016).…”
Section: Theoretical Background Of the Studymentioning
Summary
This paper studies the impact of government borrowing costs on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra‐expansionary monetary policies of recent years. Applying the panel data econometric approach for a sample of OECD and 11 early euro area countries over the period 1985–2015, the study suggests a positive and statistically significant impact of government borrowing costs on cyclically adjusted primary balances, indicating that a decrease in borrowing costs leads to a deterioration of fiscal policy stance. The findings herein also suggest that this effect in the euro area seems to be driven by a group of its peripheral rather than core countries and appears to work through the expenditure (more specifically, current expenditure) channel. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra‐low interest rates may cause negative side effects for fiscal discipline.
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