Estimation of a fiscal policy rule for EMU countries (1984-2005)

Abstract

The primary objective of this paper is to estimate a fiscal policy rule for each of the EMU member States from 1984 to 2005 in order to know if there has been a systematic response of the cyclically adjusted primary balance to output gap and debt level variations. Also, we aim to discover whether the change in the fiscal framework which took place after 1992 has had a substantial impact on the fiscal policy applied. The principal novelty is that the estimation is performed simultaneously by means of a SURE (Seemingly Unrelated Regression Estimator) model. We are thus able to obtain different coefficients for each country, while developing possible correlations between national fiscal policies which would reveal the existence of common factors. The results provide clear evidence of a structural break in the rule after the introduction of the new fiscal regulations and, as the hypothesis of equality in the national coefficients of the rule is clearly rejected, reveal a need to consider specific national factors.