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Time-varying cyclicality of fiscal policy: The case of the Euro area

2022; Elsevier BV; Volume: 62; Linguagem: Inglês

10.1016/j.najef.2022.101778

1879-0860

António Afonso, Francisco Tiago Carvalho,

Global Financial Crisis and Policies

We assess the cyclicality of fiscal policy in the 19 Euro area countries, notably during recessions, for the period 1995–2020. We use a time-varying measure of fiscal cyclicality to describe fiscal policy developments. The results suggest that during recessions discretionary fiscal policy becomes more pro-cyclical, but the overall budget balance becomes more counter-cyclical. Hence, pursuing a Ricardian fiscal regime by more indebted countries leads to higher counter-cyclicality of fiscal policy. Government size reduces counter-cyclicality, as well as trade openness, and financial development has a positive impact on counter-cyclicality.