Panel Data Evidence on the Effects of Fiscal Policy Shocks in the EU New Member States

Abstract

We identify fiscal policy shocks in the EU new member states using four different methods. We use panel data techniques to estimate the output response to these shocks. We find that investment and export growth increase after fiscal consolidation and decelerate after fiscal stimulus when the shocks are expenditure-based. In contrast, private consumption does not respond to fiscal policy shocks. Expenditure-based fiscal consolidations reduce wages, supporting the view that fiscal consolidation of such composition enhances the competitiveness and profitability of domestic enterprises. In contrast, we do not find evidence of fiscal shocks affecting households' confidence. Policy points• The composition of fiscal policy actions is relevant for their macroeconomic effects. Fiscal stimulus is effective in boosting GDP 190Fiscal Studies growth when it is tax-based, but not when it is mainly expenditurebased. In turn, expenditure-based fiscal consolidation does not appear to be costly in terms of GDP growth, but tax hikes reduce GDP growth.• Reduction in government expenditure is often accompanied by acceleration in exports and private investment growth. Expenditurebased consolidations contribute to improvements in countries' shortterm cost competitiveness by limiting wage pressure.• Discretionary changes in public deficit do not affect households' expectations and consumption.

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