notwithstanding, evidence of pro-cyclicality in fiscal policy has been uncovered in a
number of studies.
GaH and Perotti (2003) show that EMU countries’ fiscal policies seem to have been
significantly pro-cyclical in the pre-Maastricht period. In the post-Maastricht period,
however, EMU countries’ fiscal policies appear to be more counter-cyclical. According to
GaH and Perotti, the behaviour of discretionary fiscal policy during recessions turned
from being somewhat pro-cyclical to becoming counter-cyclical. EMU countries seem to
have been lagging behind non-EMU countries since they pursued largely pro-cyclical
policies during the recession of the early 1990s and changed their behaviour only in the
early 2000s. GaH and Perotti base their study on both a panel estimate and individual
country regressions. With respect to Austria, interestingly, they find a mildly counter-
cyclical fiscal policy before Maastricht (a feature that is in contrast to all other EMU
countries) and a stronger counter-cyclicality in the post-Maastricht period.
Hallerberg and Strauch (2002) find pro-cyclical policies for the last three decades, at least
for the EU. According to Hallerberg and Strauch, discretionary measures have tended to
undermine automatic stabilisers while taxes have fluctuated counter-cyclically in a
conventional manner. On the expenditure side, they find that public investment displays a
consistent pro-cyclical pattern. The latter was also found by Alberola et al. (2003).
Buti et al. (1997), too, state that contractionary fiscal policies prevailed during recessions
and that fiscal discipline was lacking during the expansionary periods as deficits persisted
during mild phases of expansions and only abated at the peaks. They conclude that the
deterioration during expansions was much more marked than the strengthening of fiscal
discipline during recessions, as the debt ratio grew sharply in the 1980s and the first half
of the 1990s.
Pro-cyclicality of fiscal behaviour in the EMU countries has also been observed by the
IMF (2004). Based on a method very similar to GaH and Perotti (2003), the study shows
that the degree of pro-cyclicality reflects, inter alia, country-specific budgetary
institutions, structural characteristics, such as the sensitivity to real disturbances, and
inherited fiscal positions. According to this IMF study, pro-cyclical fiscal impulses turn
out to be more pronounced in good times (loosening) than in bad times (tightening),
which points to the difficulty of resisting pressures to increase spending or cut taxes in
the face of revenue windfalls. The study, however, also finds that the European fiscal
framework appears to have led to some reduction in pro-cyclical fiscal behaviour in
EMU, owing to a more counter-cyclical policy stance in bad times that was not balanced
out by sufficient deficit reduction in good times.
Also the European Commission (2001) comes to the conclusion that between 1970 and
2000 the deficits of EU countries did not fall during favourable cyclical periods, i.e. that
the effects of the automatic built-in stabilisers were offset by countries’ discretionary
fiscal policies, namely by tax cuts and, in particular, by expenditure increases, which
necessitated a tightening during economic downturns.
Gavin and Perotti (1997) detect that in Latin American countries - in sharp contrast to the
industrial economies - fiscal policies have been pro-cyclical, and particularly so in
recessions. For industrial countries they find asymmetries insofar as budget surpluses
increase during good times; during bad times, however, the fiscal response to changes in
output growth is much larger. In their view, for industrial countries this is consistent with
101