Determinants of discretionary fiscal policy in Central and Eastern Europe

This paper explores economic, political and institutional determinants of discretionary fiscal policy in 11 Central and Eastern European (CEE) countries from 2000 to 2013 and compares discretionary fiscal reactions before and during the global economic crisis. We find that fiscal policy was procyclical to the output gap both before and during the crisis, while no fiscal reaction to the absorption gap was captured. Our results also indicate a negative relationship between the level of public debt and deficits over the entire period and the pre-crisis period, suggesting that rising public debt represented a brake on future deficits. We also find that election cycles affect the fiscal deficit, but only during the pre-crisis period, while no evidence of a relationship between fiscal policy and government fragmentation was captured. We find some evidence that in the pre-crisis period the CEE countries with a fixed exchange rate regime ran lower deficits than those with a floating regime, whereas during the crisis no impact of the exchange rate regime on the fiscal deficit was found. There is also some evidence that an, arrangement with the IMF was associated with lower deficits for the entire sample period. However, no impact of EU accession on the fiscal stance was identified.