Fiscal Policy in CEE Countries. Evidence from Czech Republic and Romania

I investigate the fiscal policy in CEE countries using evidence from two of the most important economies, Czech Republic and Romania. A small open economy model with a Taylor fiscal rule is estimated on quarterly data for these countries. I explore the potential of counter-cyclical fiscal policy in the context of the ongoing financial crisis, the reaction of the fiscal policy to negative demand shocks or to a more relaxed monetary policy, as well as the impact of fiscal shocks. There are evidences that fiscal shocks during the last years behaved in a pro-cyclical way and it appears that the countercyclical potential of fiscal policy during the financial crisis remained largely unused.