Go to page

Bibliographic Metadata

Restriction-Information
 The document is publicly available on the WWW
Links
Abstract

This paper studies heterogeneity in the fiscal reaction function for European Union members by

resorting to the unconditional quantile regression estimation. Based on annual observations

spanning from 2005 to 2018, the results point to significant asymmetries concerning the fiscal

response measured in terms of the cyclically adjusted primary balance to different covariates.

First, the primary deficit has a stronger reaction to debt across the lower quantile, which becomes

weaker as the balance reaches a surplus. This indicates the prevalence of fiscal discipline to ensure

the public finance sustainability. Moreover, the life-expectancy negatively affects the fiscal

position and the response is the highest compared to other covariates, which can diminish the

debt and business stabilizing response. Governments seem to run more pronounced pro-cyclical

fiscal policy when the fiscal position is already deteriorated. These empirical evidences are

questioning current as well as future policy design particularly against the background of the

recent pandemic situation exerting supplementary social and financial burden on the countries.

In addition, the level of economic development matters for the response pattern and the reaction

is stronger and positive when countries face poorer fiscal positions. Also, an increase in the longterm

interest rate amplifies the deterioration of fiscal balance especially when its condition is

already bad. Finally, our estimations show that the fiscal position improves as an effect of

educational attainment and of external position especially when the former reaches surplus.