Is the Fiscal Policy of the Czech Republic Pro-cyclical?

Abstract

The main goal of this paper is to analyse whether the fiscal policy of the Czech Republic is anti-cyclical. This analysis is carried out through decomposing the government’s balance into its cyclical and structural part. The first differences of the structural part are then put in relation to the output gap to determine whether the fiscal policy is pro- or anti-cyclical. Moreover, the correlation of government expenditures and revenues with the business cycle is also subject of our analysis. We also examine whether the fiscal rules which the Czech Republic would have to adhere to once it enters the euro area limit fiscal policy as a stabilizing mechanism.The paper concludes that the fiscal policy in the Czech Republic was for the most part rather of a random character than anti-cyclical during the examined period 1998–2013. This conclusion has two implications. Firstly, there is still room for improvement in fully and consistently utilizing fiscal policy to stabilise the Czech economy throughout economic cycles. Secondly, fiscal rules would not limit the Czech government to practice anti-cyclical fiscal policy if they have been implemented since 1998.

Keywords

• fiscal policy
• discretionary fiscal policy
• government
• structural primary balance
• semi elasticity