Fiscal behaviours in EMU countries: A dynamic approach

In this paper, we estimate the time-varying reactions of fiscal behaviours, relating the cyclical-adjusted primary balance to the output gap and debt variations for EMU countries for the period 1999-2012 using quarterly data. We estimated these behaviours using a Kalman Filter-Maximum Likelihood approach. Our results showed that the behaviours of fiscal authorities in the euro area have evolved since 1999 at least once in response to both internal targets and external shocks. In particular, most countries pursued a counter-cyclical policy after 2008, while the current period is characterised by an a-cyclical or pro-cyclical policy. Changes in the orientation of fiscal policies are also manifested by changes in the concern for sustainability. The results also show that the fiscal stance is improved by faster credit growth and is worsened in the presence of parliamentary elections.