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Fiscal policy in central and Eastern Europe: what happened in the run-up to EU accession?

  • Economics
  • Political Science


ORIGINAL PAPER Fiscal policy in central and Eastern Europe: what happened in the run-up to EU accession? John Lewis Published online: 24 February 2007 # Springer-Verlag 2007 Abstract This paper analyses the evolution of fiscal policy in central and eastern European countries during the EU accession process, testing for country and time specific effects. This is done by constructing Taylor-type policy rules and by calculating three measures of fiscal stance. A key finding is that the differences across countries are more significant than those across time. Baltic countries tended to have had tighter fiscal policy which responded to the output gap, larger central European countries had more lax (and increasingly lax) fiscal policies which were unresponsive to the output gap. These differences correlate closely with cross- country differences in exchange rate regimes and no link is found to either spending composition or political variables. Taken together the results suggest that the exchange rate regime is by far the most significant determinant of fiscal performance. These results suggest that the “soft power” of the prospect of EU entry did not act as a spur to greater fiscal discipline and that higher budget deficits in recent years cannot be blamed on costs of accession. Keywords Fiscal policy . New EUmember states . Fiscal discipline . Accession process JEL Classification E62 . E65 1 Introduction Better policymaking and institutional reforms are often cited as key benefits of closer European integration. The experience of the EU expansions to the South and to the IEEP (2007) 4:15–31 DOI 10.1007/s10368-007-0080-x The views expressed are those of the author and not necessarily those of De Nederlandsche Bank or the Bank of Estonia. J. Lewis (*) Economics and Research Division, De Nederlandsche Bank, Postbus 98, 1000AB Amsterdam, The Netherlands e-mail: [email protected] East provides compelling evidence for the accession process as an impetus for rapid and far reach

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