Download Harald Stieber

Trade-off in Austrian budgetary policies with and
without the Maastricht constraint
Harald Stieber, University of Vienna and Austrian Federal Ministry of Finance,
Himmelpfortgasse 4, A-1015 Vienna, mail: [email protected]
Abstract:
In this paper, I use an algorithm for determining optimal policies for nonlinear stochastic
dynamic models to deal with the problem of designing optimal budgetary policies for
Austria in its position as a member of EMU.
1
In one set of simulations the so-called Eurogroup-decision from Ocotber 7th, 2002 is
implemented as a constraint in the optimization, in another set of simulations there is no
such constraint. for the design of optimal fiscal policies. This issue is of great political
relevance, as can be seen from recent highly controversial policy debates in Europe: Is
consolidation an appopriate policy strategy at times of low rates of growth?
To shed some light on this question, I choose an approach of quantitative economic
policy to determine numerically optimal budgetary policies for the next few years by
minimizing an intertemporal objective function subject to the constraints given by an
econometric model as in (NECK and STIEBER, 2002).
This model, called BMF2003, is a medium-size macroeconometric demand-side model
for Austria, relating policy and exogenous variables to objective variables of Austrian
fiscal policies. The specification is such that Austria cannot influence either the market's
interest rate or its exports, thus I account for the close integration of the Austrian
economy and its long-established dependence on German/European money and credit
market developments.
The model, which is dynamic and nonlinear, was estimated first by OLS and then by
simultaneous equations estimation methods using annual data over the period 1977 to
2002 using yearly data from national account (ESA95) and data from the Austrian
stability programme. The estimates and test statistics together with ex-post simulation
results suggest that the model provides a reasonable account of the development of
1
The EU's ministers of finance, the ECB and the EC agreed in the Eurogroup on Oct. 7 th, 2002 that
those countries having not yet reached a budgetary position of close-to-balance or surplus shall
improve their underlying (structural) budget

continuously

per year

by 0,5 % of GDP;
countries in excessive deficit have to consolidate more. All ministers except one (F) agreed that this rule should be
applied no later than for the budgets of 2003 and has to be included together with the necessary measures in the next
round of stability programmes. The efforts of member countries would be scrutinized in Spring 2003 in the process of
the formulation of the Guidelines for Economic Policy always taking into account the current state of the economy
(KATTERL, PART, and STIEBER, 2003).
economic variables in the recent past. A more detailed description of the model and its
statistical properties will be provided in the full version of the paper.
The objective function penalizes deviations of objective variables from their desired
("ideal") values. Exogenous variables of the model are forecast over the planning
horizon, which is assumed to be 2003 to 2007 using - where available – consensus
forecasts from the European Commission until 2005 and a preliminary set of external
assumptions as it will enter the next update of the Austrian stability programme.
Optimal fiscal policies are calculated over this time horizon using the stochastic optimum
control algorithm OPTCON developed by MATULKA and NECK, 1994. Using different
specifications of the objective function and convex combinations of weights on the policy
variables in the optimizations I can derive interesting trade-offs between policies
respecting the consolidation rule of the Eurogroup decision and those not.
In the full version of the paper, I will show the results of the simulations and of the
optimum control experiments. In particular, I will show that the quantified (immediate,
short-run) trade off between growth and consolidation that has been debated so hotly
ever since growth has slowed after 2000.
Keywords: European Economic and Monetary Union (EMU), Fiscal Policy, Stability and
Growth Pact (SGP), Macroeconometrics, Modelling, Optimum Control Theory
JEL-classification: C3, C6, E6, H6
References
KARBUZ, Sohbet and Josef MATULKA, and Reinhard NECK (1994), OPTCON: An Algorithm for the
Optimal Control of Nonlinear Stochastic Models User Manual, University of Bielefeld, Faculty of
Economics
KATTERL, Alfred and Peter PART and Harald STIEBER (2003), Was zeigen konjunkturbereinigte
Haushaltssalden? Working Paper, BMF, forthcoming
NECK, Reinhard and Sohbet KARBUZ (2002),Optimal Budgetary Policies for Austria: a Stochastic
Optimum Control Analysis, Journal of Management and Economics 6
NECK, Reinhard and Harald STIEBER (2003), Tradeoffs of Austrian Budgetary Policies: An Optimum
Control Analysis, mimeo
VAN DEN NOORD, Paul (2001), The Size and Role of Automatic Fiscal Stabilizers in the 1990s and
beyond;
OECD
Economic
Department
Working
Paper
No.
230,
Paris,
http://www.oecd.org/pdf/M00001000/M00001683.pdf