Keywords

Excessive Deficit Procedure, fiscal consolidation, difference-in-difference

This paper estimates the effect of Excessive Deficit Procedure (EDP) on fiscal consolidation for EU member states between 2005 and 2019. Using the quarterly data which enables more time granularity and the recent advances in the difference-in-difference literature which allow for differently timed, non-absorbing treatments with dynamic effects, we estimate the causal effect of EDP on cyclically adjusted primary b alance. Our findings point to a strong fiscal consolidation effect in the EU under the EDP, measuring to 1.69 percentage point improvement in fiscal stance. While the improvement of fiscal stance under the EDP acted as a counter-cyclical measure during economic expansion, we descriptively show that fiscal consolidation due to the EDP directed policymakers towards a restrictive pro-cyclical stance, especially during the global financial c risis. Finally, we contextualize these findings within the new EU’s fiscal rules, which emphasize the medium-term fiscal adjustment.