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Are European fiscal rules that bad? Discretionary fiscal policies in New Member States

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Abstract

There is no clear-cut evidence on how the adoption of the European fiscal standards influences discretionary fiscal policies within the Member States. This study investigates that phenomenon on the example of the 2004 enlargement. The results show that the effects of the adoption of EU fiscal rules bring a statistically significant change toward more counter-cyclical behavior. The results are robust for different model specifications, including alternative time spans and correcting for the possible influence of the financial crises and political forces. Interestingly, the year 2004 did not have any significant impact on the change in fiscal policies in the Old Member States, suggesting that the EU entry might motivate new members to run more prudent budgetary policies.

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Notes

  1. For a detailed analysis of the evolution of fiscal rules in the EU, see Wyplosz (2006).

  2. The term ’acyclical’ refers to Gali and Perotti (2003) and means that there was no significant impact of discretionary policy on the business cycle fluctuations.

  3. In the analysis, we focus on the period from Q1 2000 until Q2 2008 in order to avoid possible spurious relations caused by the global financial crisis and the sovereign debt crisis.

  4. Candelon et al. (2010) applies the dynamic panel method to correct for the endogeneity bias. Originally, the dynamic panel technique was designed for large-N and small-T samples, meaning for settings with many individuals and limited number of periods. In our data set, however, we observe the opposite. Therefore, we favor the panel IV technique over the dynamic panel methods. Nevertheless, we apply the dynamic panel estimation as a robustness check, confirming our main findings.

  5. More detailed and disaggregated figures based on countrywise data are included in ‘Appendix 1.’

  6. See also Darby and Melitz (2008) for that discussion.

  7. This outlier does not bring any qualitative change to the estimation results so as to the final inference. Therefore, we decide to leave it in the data set in order to make it more methodology consistent.

  8. Recently, many studies use real-time data (Beetsma and Giuliodori 2008; Lewis 2009). However, we resort to ‘conventional’ final data as availability may be a crucial issue here.

  9. This number is strongly influenced by Ireland, as Fig. 7 reveals.

  10. Due to data availability, the Romanian interest rate until 2005 is the treasury bill rate.

  11. All the breaking points with rank 1 are considered to be the most likely candidates for the structural change.

  12. All the estimations have been implemented in STATA 12.

  13. The results are robust to all the other model specifications.

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Acknowledgments

Authors would like to thank Cees Diks, the participants of the 11th Annual NBP-SNB Joint Seminar in Starawieś, two anonymous referees and the editor for valuable comments. Any views expressed are only those of authors and do not necessarily represent the views of the European Investment Bank.

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Authors and Affiliations

  1. Bielefeld University, Universitätsstraße 25, 33615, Bielefeld, Germany

    Bettina Fincke

  2. European Investment Bank, 98-100 Boulevard Konrad Adenauer, 2950, Luxembourg, Luxembourg

    Marcin Wolski

Authors
  1. Bettina Fincke
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  2. Marcin Wolski
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Correspondence to Marcin Wolski.

Appendix 1: Additional figures and data information

Appendix 1: Additional figures and data information

This appendix shows the disaggregated information from Figs. 1, 2, 3 and 4 with countrywise data and a table on detailed information of the data (Figs. 6, 7, 8, 9, 10, 11, 12 and 13; Tables 7). Table 8 presents additional robustness results.

Fig. 6
figure 6

Primary balance ratio NMS. Source: ECB (2013), own calculations

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Fig. 7
figure 7

Primary balance ratio OMS. Source: ECB (2013), own calculations

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Fig. 8
figure 8

Output gap ratio NMS. Source: ECB (2013), IMF (2013a), own calculations

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Fig. 9
figure 9

Output gap ratio OMS. Source: ECB (2013), IMF (2013a), own calculations

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Fig. 10
figure 10

Debt ratio NMS. Source: ECB (2013), own calculations

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Fig. 11
figure 11

Debt ratio OMS. Source: ECB (2013), own calculations

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Fig. 12
figure 12

Interest rate gap NMS. Source: IMF (2013a), own calculations

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Fig. 13
figure 13

Interest rate gap OMS. Source: IMF (2013a), own calculations

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Table 7 Detailed data information (own calculations)
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Table 8 Discretionary fiscal rule in the New Member States before (BEU) and after (AEU) accession to the European Union: robustness check for models 3–5 from Table 1 on the example of the truncated sample Q12001–Q42008
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Fincke, B., Wolski, M. Are European fiscal rules that bad? Discretionary fiscal policies in New Member States. Empir Econ 51, 517–546 (2016). https://doi.org/10.1007/s00181-015-1006-z

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