Real-time determinants of fiscal policies in the euro area

We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policymakers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.