Thesis title: Institutions and Constraints in Fiscal Policy - Three Empirical Essays
This thesis comprises three empirical studies focusing on fiscal policy. The first two papers investigate the role of the European fiscal framework in shaping the countercyclical capacity of fiscal policy. To this end, they employ advanced econometric techniques, including the estimation of time-varying cyclicality parameters using two distinct approaches (based on Schlicht, 2022, and Giraitis et al., 2021), alongside Hansen threshold models. The analysis further exploits different vintages of fiscal data, allowing for a comparison between estimates based on ex-post revised data and those derived from ex-ante, or real-time, data actually available to policymakers.
The findings reveal that the impact of fiscal rules on the cyclicality of fiscal policy is highly heterogeneous. This heterogeneity emerges both across groups of countries (core versus peripheral economies) and with respect to public debt levels. In particular, a robust debt threshold is identified, beyond which the effect of fiscal rules on fiscal cyclicality changes sign. The main result indicates that, in high-debt environments, fiscal rules tend to induce procyclical behaviour. Notably, this effect is considerably stronger and more clearly identified when using ex-ante data rather than ex-post revisions, which are not part of the policymakers’ information set.
The third paper departs from the previous two both in terms of its research question and its methodological approach, relying primarily on local projections and Heckman probit models. It focuses on episodes of fiscal consolidation aimed at reducing the debt-to-GDP ratio, examining the role of budget rigidities, particularly on the expenditure side, in determining their success. The results show that countries characterised by more rigid budget structures, with a higher share of non-discretionary spending (such as compensation of employees and pensions), are more likely to implement consolidations disproportionately based on cuts to public investment. This composition of adjustment is associated with a lower likelihood of success, mainly due to a more pronounced contraction in output compared with more balanced consolidation strategies, typically adopted by countries with more flexible budget structures.