For better and worse: heterogeneity in the fiscal response in EU countries

ABSTRACT

In this paper, using a panel of annual observations ranging from 2005 to 2018, we employ the novel unconditional quantile regression by resorting to an augmented fiscal reaction function model to examine the distribution-varying fiscal response for 26 European Union countries. The results point to significant asymmetries regarding the fiscal response measured in terms of the cyclically adjusted primary balance to different covariates. More specifically, we report a U-shaped fiscal reaction to debt changes suggesting more explicit debt stabilization concerns during high-deficit periods. We also show a varying response when debt exceeds the 60% threshold, which is conditioned by the size of the fiscal position. In addition, we reveal a procyclical fiscal behaviour when balance is highly deteriorated.

KEYWORDS:

• Fiscal reaction function
• heterogeneity
• fiscal sustainability
• unconditional quantile regression

JEL CLASSIFICATION:

• C21
• E62
• H63

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.