1.0.0.0.UTYG Taxes linked to imports and production (indirect taxes), general
government, national currency, current prices. 1.0.0.0.UTVGF, 1.0.0.0.UTVG General government consolidated gross debt, excessive deficit procedure
(based on ESA 1995) and former definition (linked series) (% of GDP at market prices).
1.0.319.0.UDGGL
Net lending (+) or net borrowing (-) excluding interest of general government adjusted for the cyclical component. Adjustment based on potential GDP excessive deficit procedure (% of GDP at market prices).
1.0.319.UBLGBP
OECD GDP - at current prices and current exchange rates, million USD. $ OECD GDP - volume indices (2000 = 100). $
OECD Population - mid year estimates in thousands. $
Note: * series from the EC AMECO database. $ - series from the OECD: “National Accounts - Volume I”.
References
Afonso, A. (2001). “Non-Keynesian Effects of Fiscal Policy in the EU-15,” ISEG/UTL – Technical University of Lisbon, Department of Economics, Working Paper No 07/2001/DE/CISEP.
Afonso, A. (2005a). “Fiscal Sustainability: The Unpleasant European Case”, FinanzArchiv, 61 (1), 19-44.
Afonso, A. (2005b). “Ricardian Fiscal Regimes in the European Union”, European Central Bank, Working Paper No 558, November.
Alesina, A. and Ardagna, S. (1998). “Tales of Fiscal Contractions,” Economic Policy, 27, 487-545.
Alesina, A. and Perotti, R. (1995). “Fiscal Expansions and Adjustments in OECD countries,” Economic Policy, 21, 205-248.
Alesina, A. and Perotti, R. (1997a). “The welfare state and competitiveness,” American Economic Review, 87 (5), 921-939.
Alesina, A. and Perotti, R. (1997b). “Fiscal Adjustments in OECD countries:
Composition and Macroeconomic Effects,” International Monetary Fund Staff Papers, 44 (2), 210-248.
Alesina, A.; Perotti, R. and Tavares, J. (1998). “The Political Economy of Fiscal Adjustments,” Brookings Papers on Economic Activity, 1, 197-266.
Ardagna, S. (2004). “Fiscal Stabilizations: When do they Work and Why,” European Economic Review, 48 (5), 1047-1074.
Barry, F. and Devereux, M. (1995). “The 'Expansionary Fiscal Contraction' Hypothesis:
A Neo-Keynesian Analysis,” Oxford Economic Papers, 47, 249-264.
Bergman, U. and Hutchison, M. (1997). “Economic Expansions and Fiscal Contractions:
International Evidence and the 1982 Danish Stabilization,” University of California at Santa Cruz, Department of Economics, Working Paper 386.
Bertola, G. and Drazen, A. (1993). “Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity,” American Economic Review, 83 (1), 11-26.
Blanchard, O. (1990). “Comment, on Giavazzi and Pagano (1990)”, in Blanchard, O. and Fischer, S. (eds.), NBER Macroeconomics Annual 1990, 111-116.
Bradley, J. and Whelan, K. (1997). “The Irish expansionary fiscal contraction: A tale from one small European economy,” Economic Modelling, 14 (2), 175-201.
Briotti, M. (2005). “Economic reactions to public finance consolidation: A survey of the literature”, European Central Bank, Occasional Paper No 38, October.
Cour, P.; Dubois, E.; Mahfouz, S. and Pisani-Ferry. J. (1996). “The Costs of Fiscal Adjustment Revisited: how Strong is the Evidence?” CEPII Working Paper 96-16.
Creel, J. (1998). “Contractions Budgétaires et Contraintes de Liquidité: les Cas Danois et Irlandais, ” Économie Internationale, 75, 3rd quarter, 33-54.
De Bonis, V. and Paladini, R. (1997). “Fiscal Adjustment in Europe and Ricardian Equivalence,” Banca Nazionale del Lavoro Quarterly Review, 51 (206), 247-272.
De Ménil, G. (1996). “Les politiques budgétaires en Europe à la veille de l' Union Monétaire”, Économie Internationale, 68, 4th quarter, 31-55.
EC (2003). Public Finances in EMU, European Commission.
Feldstein, M. (1982). “Government Deficits and Aggregate Demand,” Journal of Monetary Economics, 9 (1), 1-20.
Giavazzi, F. and Pagano, M. (1990). “Can Severe Fiscal Contractions be Expansionary?
Tales of Two Small European Countries,” in Blanchard, O. and Fischer, S. (eds.), NBER Macroeconomics Annual 1990, MIT Press.
Giavazzi, F. and Pagano, M. (1996). “Non-keynesian Effects of Fiscal Policy Changes:
International Evidence and the Swedish Experience,” Swedish Economic Policy Review, 3 (1), 67-103.
Giavazzi, F.; Jappelli, T. and Pagano, M. (2000). “Searching for non-linear effects of fiscal policy: evidence from industrial and developing countries,” European Economic Review, 44 (7), 1259-1289.
Giudice, G., Turrini, A. and in’t Veld, J. (2004). “Non-keynesian fiscal consolidation in the EU? Ex post evidence an ex ante analysis”, CEPR Discussion Paper 4388.
Hauptmeier, S.; Heipertz, M. and Schuknecht, L. (2006). “Expenditure reform in industrialised countries – a case study approach,” mimeo.
Hellwig, M. and Neumann, M. (1987). “Economic Policy in Germany: Was there a Turnaround?” Economic Policy, 2 (2), 103-146.
Heylen, F. and Everaert, G. (2000). “Success and Failure of Fiscal Consolidation in the OECD: A Multivariate Analysis,” Public Choice, 105 (1/2), 103-124.
Hjelm, G. (2002). “Is private consumption growth higher (lower) during periods of fiscal contractions (expansions)?” Journal of Macroeconomics 24 (1), 17-39.
Im, K.; Pesaran, M. and Shin, Y. (2003). “Testing for unit roots in heterogeneous panels,”
Journal of Econometrics, 115, 53-74.
Judson, R. and Owen, A. (1999). “Estimating dynamic panel data models: a guide for Macroeconomists”, Economics Letters, 65 (1), 9-15.
Lambertini, L. and Tavares, J. (2005). “Exchange Rates and Fiscal Adjustments:
Evidence from the OECD and Implications for EMU,” Contributions to Macroeconomics, 5 (1), Article 11.
Levin, A; Lin, C. and Chu, C. (2002). “Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties,’ Journal of Econometrics, 108, 1-24.
McDermott, C. and Wescott, R. (1996). “An Empirical Analysis of Fiscal Adjustments,”
International Monetary Fund Staff Papers, 43 (4), 725-753.
Miller, S. and Russek, F. (1999). “The Relationship between large fiscal adjustments and short-term output growth under alternative fiscal policy regimes,” University of Connecticut Working Paper.
Perotti, R. (1998). “The Political Economy of Fiscal Consolidations,” Scandinavian Journal of Economics, 100 (1) 367-394.
Perotti, R. (1999). “Fiscal Policy in Good Times and Bad,” Quarterly Journal of Economics, 114 (4), 1399-1436.
Sutherland, A. (1997). “Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Effects of Fiscal Policy?” Journal of Public Economics, 65 (2), 147-162.
Uctum, M. and Wickens, M. (2000). “Debt and deficit ceilings, and sustainability of fiscal policies: an intertemporal analysis,” Oxford Bulletin of Economic Research, 62 (2), 197-222.
van Aarle, B. and Garretsen, H. (2003). “Keynesian, non-Keynesian or no effects of fiscal policy changes? The EMU case,” Journal of Macroeconomics, 25 (2), 213-240.
Von Hagen, J., Hughes-Hallet, A. and Strauch, R. (2001). “Budgetary consolidation in EMU,” European Commission, Economic Papers, 148.
Weyerstrass, K.; Jaenicke, J.; Neck, R.; Haber, G.; van Aarle, B.; Schoors, K.; Gobbin, N. and Claeys, P. (2006). “Economic spillover and policy coordination in the Euro Area”, European Commission, Economic Papers No 246, March.
Figures and tables
Figure 1 – Changes in the primary cyclically adjusted budget balance: 1970-2005
N=505 Mean=0.040 Stdev=1.578
0 10 20 30 40 50 60 70 80
-4,7 -3,8 -2,8 -1,9 -0,9 0,0 1,0 1,9 2,9 3,9 4,8 5,8 6,7
Change in primary cyclically adjusted balance (% of GDP)
Frequency
Table 1 – Some empirical results on non-Keynesian fiscal effects
Reference Sample Tests performed Method Results
Giavazzi and
Pagano (1990) 10 OECD countries (1973-1989); Ireland
OLS Public spending cuts increase private consumption.
De Ménil
(1996) OECD countries
(1960-1992) Effect on consumption of public expenditures increase.
OLS Keynesian effects in countries where consumers are not constrained; null multipliers in countries without liquidity
OLS, 2SLS There are non-Keynesian effects from public spending and taxes.
Perroti (1999) OECD countries
(1965-1994) Effect on private
consumption of a budget deficit increase.
VAR The bigger the debt-to-GDP ratio the more likely is that the fiscal consolidation turns out to be expansionist.
fixed effects Fiscal contractions are expansionary when based on tax increases instead of spending cuts.
Heylen and Everaert (2000)
OECD countries
(1975-1995) Effect on the
debt-to-GDP ratio of budget components.
OLS Inconclusive.
Afonso (2001) EU15 countries
(1970-2001) Effect on private
consumption of a budget deficit increase.
OLS pooled Little evidence of non-Keynesian effects.
Von Hagen et
al. (2001) OECD countries
(1960-1998) Descriptive analysis,
output equations. Probit
model Inconclusive.
van Aarle and Garretsen (2003)
EU countries
(1990-1998) Effect on private
consumption of budgetary components.
OLS pooled Inconclusive.
Ardagna
(2004)) 17 OECD countries
(1975-2002) Effect on GDP growth of budgetary
components.
OLS pooled Evidence of non-Keynesian effects.
Giudice et al.
(2004) 14 EU countries
(1790-2002) Effects on growth. EC QUEST
model Evidence of non-Keynesian effects.
Weyerstrass et
al. (2006) Finland, France, Ireland, Italy
Neherlands (70:I-05:I);
9 EU countries (77-04)
Effect on private consumption of budgetary components.
OLS pooled Limited evidence in favour of non-Keynesian effects.
Table 2 – Fiscal episodes (FE), based on the change in the cyclically adjusted primary budget balance
FE1 FE2 FE3 Country
Expansions Contractions Expansions Contractions Expansions Contractions
AU 76 97 76 84, 97, 01 76 84, 97, 01
FE1 – Measure used by Giavazzi and Pagano (1996): the cumulative change in the primary cyclically adjusted budget balance is at least 5, 4, 3 percentage points of GDP in respectively 4, 3 or 2 years, or 3 percentage points in one year.
FE2 – Measure used by Alesina and Ardagna (1998): the change in the primary cyclically adjusted budget balance is at least 2 percentage points of GDP in one year or at least 1.5 percentage points on average in the last two years.
FE3 – Measure based on (1).
Table 3 – Descriptive statistics (full sample): 1970-2005
Series Mean Std dev Min Max N C 2.423 0.905 1.078 4.794 540
∆C 0.021 0.023 -0.081 0.122 525
Y 2.984 0.968 1.418 5.542 540
∆Y 0.023 0.024 -0.083 0.105 525
FCE 1.298 1.148 -0.742 4.252 540
∆FCE 0.034 0.042 -0.080 0.414 525
TF 1.034 1.128 -1.956 3.808 538
∆TF 0.036 0.054 -0.516 0.356 522
TAX 1.617 1.199 -0.534 4.705 530
∆TAX 0.029 0.043 -0.115 0.171 522 Note: variables are taken as logarithms of real per capita observations. For example,
C=log(CONS/YDEF)*(1/POP), where CONS – private consumption; YDEF – price deflator of GDP, national currency; POP – population.
Source: AMECO Database, updated on 14 November 2005.
Table 4 – Panel unit root results (1970-2005)
Common unit root (LLC) Individual unit root (IPS) Series
Statistic Probability N Statistic Probability N C -4.64 0.000 505 0.92 0.817 505
∆C -8.41 0.000 500 -9.91 0.000 500 Y -2.17 0.015 503 2.56 0.995 503
∆Y -11.13 0.000 493 -11.78 0.000 493 FCE -11.01 0.000 518 -5.32 0.000 518
∆FCE -13.39 0.000 508 -13.39 0.000 508
TF -9.61 0.000 511 -4.74 0.000 511
∆TF -11.72 0.000 501 -11.49 0.000 501 TAX -4.28 0.000 500 0.95 0.830 500
∆TAX -13.76 0.000 498 -14.00 0.000 498
Notes: LLC – Levin, Lin and Chu. IPS – Im, Pesaran, and Shin.
Table 5 – Fixed effects’ estimation results for specification (2), 1970–2005
Null hypothesis Test statistic p-value Test statistic p-value Test statistic p-value
α1−α2 = 0 1.11 0.29 0.61 0.64 0.00 0.95
γ1−γ2 = 0 2.07 0.15 2.64 0.10 0.61 0.44
−α1−γ1 = 0 0.00 0.97 0.14 0.71 0.23 0.63
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 6 – Fixed effects’ estimation results for specification (2),
Null hypothesis Test statistic p-value Test statistic p-value Test statistic p-value
α1−α2 = 0 0.82 0.37 0.13 0.72 0.59 0.44
γ1−γ2 = 0 0.10 0.76 0.09 0.77 0.45 0.50
−α1−γ1 = 0 3.99 0.05 3.02 0.08 3.33 0.07
β1−β2 = 0 1.13 0.29 0.03 0.87 0.14 0.71
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1992–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 7 – Fixed effects’ estimation results for specification (6), Byear dummy for debt
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 7 (cont.) – Fixed effects’ estimation results for specification (6), Byear dummy for debt ratio threshold, 1970–2005
FE1 (I) lr FE2 (II) lr FE3 (III) lr
Null hypothesis Test statistic p-value Test statistic p-value Test statistic p-value
β30−β40 = 0 0.23 0.63 0.56 0.45 0.27 0.60
β40−β31 = 0 7.02 0.01 5.88 0.02 1.23 0.27
β31−β41 = 0 1.24 0.27 0.93 0.33 0.01 0.93
γ10−γ11 = 0 2.73 0.09 2.54 0.11 0.24 0.62
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 8 – Fixed effects’ estimation results for specification (6), Bcountry dummy for debt
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 8 (cont.) – Fixed effects’ estimation results for specification (6), Bcountry dummy for debt ratio threshold, 1970–2005
FE1 (I) lr FE2 (II) lr FE3 (III) lr
Null hypothesis Test statistic p-value Test statistic p-value Test statistic p-value
α10−α20 = 0 25.98 0.00 1.57 0.21 3.82 0.05
γ11−γ21 = 0 1.01 0.32 1.71 0.19 0.02 0.88
β11−β21 = 0 2.18 0.14 5.12 0.02 5.49 0.02
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–
2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1 – measure used by Giavazzi and Pagano (1996); FC2 – measure used by Alesina and Ardagna (1998); FC3 – measure based on the method proposed in (1).
Table 9 – Fixed effects’ estimation results for specification (7), 1970–2005
Notes: The t statistics are in parentheses. *, **, *** - statistically significant at the 10, 5, and 1 percent level respectively. The data sample includes yearly observations for the EU15 countries over the period 1970–2005. lr – long-run elasticity of private consumption with respect to the relevant explanatory variables. FC1, FX1– measure used by Giavazzi and Pagano (1996); FC2, FX2– measure used by Alesina and Ardagna (1998); FC3, FX3– measure based on the method proposed in (1).
Table 10 – Fixed effects’ estimation results for specification (7), 1992–2005
Null hypothesis Test statistic p-value Test statistic p-value Test statistic p-value
γ6−γ4 = 0 0.29 0.59 1.03 0.31 6.85 0.01
γ4−γ3 = 0 0.34 0.56 1.10 0.30 7.55 0.01
Note: see notes to Table 9.
European Central Bank Working Paper Series
For a complete list of Working Papers published by the ECB, please visit the ECB’s website (http://www.ecb.int)
635 “Identifying the role of labor markets for monetary policy in an estimated DSGE model” by K. Christoffel, K. Kuester and T. Linzert, June 2006.
636 “Exchange rate stabilization in developed and underdeveloped capital markets” by V. Chmelarova and G. Schnabl, June 2006.
637 “Transparency, expectations, and forecasts” by A. Bauer, R. Eisenbeis, D. Waggoner and T. Zha, June 2006.
638 “Detecting and predicting forecast breakdowns” by R. Giacomini and B. Rossi, June 2006.
639 “Optimal monetary policy with uncertainty about financial frictions” by R. Moessner, June 2006.
640 “Employment stickiness in small manufacturing firms” by P. Vermeulen, June 2006.
641 “A factor risk model with reference returns for the US dollar and Japanese yen bond markets”
by C. Bernadell, J. Coche and K. Nyholm, June 2006.
642 “Financing constraints and firms’ cash policy in the euro area” by R. Pál, A. Ferrando, June 2006.
643 “Inflation forecast-based-rules and indeterminacy: a puzzle and a resolution” by P. Levine, P. McAdam and J. Pearlman, June 2006.
644 “Adaptive learning, persistence, and optimal monetary policy” by V. Gaspar, F. Smets and D. Vestin, June 2006.
645 “Are internet prices sticky?” by P. Lünnemann and L. Wintr, June 2006.
646 “The Dutch block of the ESCB multi-country model” by E. Angelini, F. Boissay and M. Ciccarelli, June 2006.
647 “The economic effects of exogenous fiscal shocks in Spain: a SVAR approach”
by F. de Castro Fernández and P. Hernández de Cos, June 2006.
648 “Firm-specific production factors in a DSGE model with Taylor price setting” by G. de Walque, F. Smets and R. Wouters, June 2006.
649 “Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers” by C. Leith and L. von Thadden, June 2006.
650 “A structural break in the effects of Japanese foreign exchange intervention on Yen/Dollar exchange rate volatility” by E. Hillebrand and G. Schnabl, June 2006.
651 “On the determinants of external imbalances and net international portfolio flows: a global perspective” by R. A. De Santis and M. Lührmann, July 2006.
653 “Acquisition versus greenfield: the impact of the mode of foreign bank entry on information and bank lending rates” by S. Claeys and C. Hainz, July 2006.
654 “The German block of the ESCB multi-country model” by I. Vetlov and T. Warmedinger, July 2006.
655 “Fiscal and monetary policy in the enlarged European Union” by S. Pogorelec, July 2006.
656 “Public debt and long-term interest rates: the case of Germany, Italy and the USA” by P. Paesani, R. Strauch and M. Kremer, July 2006.
657 “The impact of ECB monetary policy decisions and communication on the yield curve” by C. Brand, D. Buncic and J. Turunen, July 2006.
658 “The response of firms‘ investment and financing to adverse cash flow shocks: the role of bank relationships” by C. Fuss and P. Vermeulen, July 2006.
659 “Monetary policy rules in the pre-EMU era: Is there a common rule?” by M. Eleftheriou, D. Gerdesmeier and B. Roffia, July 2006.
660 “The Italian block of the ESCB multi-country model” by E. Angelini, A. D’Agostino and P. McAdam, July 2006.
661 “Fiscal policy in a monetary economy with capital and finite lifetime” by B. Annicchiarico, N. Giammarioli and A. Piergallini, July 2006.
662 “Cross-border bank contagion in Europe” by R. Gropp, M. Lo Duca and J. Vesala, July 2006.
663 “Monetary Conservatism and Fiscal Policy” by K. Adam and R. M. Billi, July 2006.
664 “Fiscal convergence before entering the EMU” by L. Onorante, July 2006.
665 “The euro as invoicing currency in international trade” by A. Kamps, August 2006.
666 “Quantifying the impact of structural reforms” by E. Ernst, G. Gong, W. Semmler and L. Bukeviciute, August 2006.
667 “The behaviour of the real exchange rate: evidence from regression quantiles” by K. Nikolaou, August 2006.
668 “Declining valuations and equilibrium bidding in central bank refinancing operations” by C. Ewerhart, N. Cassola and N. Valla, August 2006.
669 “Regular adjustment: theory and evidence” by J. D. Konieczny and F. Rumler, August 2006.
670 “The importance of being mature: the effect of demographic maturation on global per-capita GDP” by R. Gómez and P. Hernández de Cos, August 2006.
671 “Business cycle synchronisation in East Asia” by F. Moneta and R. Rüffer, August 2006.
672 “Understanding inflation persistence: a comparison of different models” by H. Dixon and E. Kara, September 2006.
674 “A quasi maximum likelihood approach for large approximate dynamic factor models” by C. Doz, D. Giannone and L. Reichlin, September 2006.
675 “Expansionary fiscal consolidations in Europe: new evidence” by A. Afonso, September 2006.
ISSN 1561081-0