The discretionary fiscal effort: an assessment of fiscal policy and its output effect

Abstract:
This paper presents an indicator of the fiscal stance that combines features of the bottom-up, narrative approach on the revenue side with a refined version of the top-down, traditional approach of the structural balance on the expenditure side. With these characteristics the indicator offers an image of fiscal policy that avoids both the 'endogeneity problems' of the structural balance and the 'indeterminacy' of the narrative approach.

This indicator is used to shed light on EU fiscal policies and estimate the average short-term output effects of fiscal policy. Results suggest that, with exceptions, fiscal policy has been conducted in a more stop and go and pro-cyclical fashion over the past decade than suggested by traditional indicators. The average fiscal multiplier is estimated at a bit below unity on average, with higher (resp. lower) multipliers associated with expenditure (resp. revenue) shocks, and higher (resp. lower) multipliers in times of declining (resp. increasing) output gaps.

European Commission: DG Economic and Financial Affairs:European Economy: Economic Papers No.543, February 2015: The discretionary fiscal effort: an assessment of fiscal policy and its output effect http://ec.europa.eu/economy_finance/publications/economic_paper/2015/ecp543_en.htm

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