Fiscal Cyclicality in EU Countries: A Rolling-Window Approach

Abstract

Fiscal cyclicality occupies a central position in macroeconomic stabilization, but existing empirical studies have focused predominantly on determining whether fiscal behaviour is procyclical or countercyclical, with relatively limited attention being paid to the dynamic evolution and intensity of fiscal response over time. The purpose of this study is to develop a dynamic framework for assessing the direction, intensity and temporal evolution of fiscal cyclicality in the European Union. This research analyses 27 Member States during the period 2001–2025. The fiscal cyclicality coefficient is estimated using five-year rolling ordinary least squares (OLS) regressions of the budget balance on the output gap, allowing fiscal cyclicality to vary across countries and over time. In order to enhance the reliability of the estimates, the computed coefficients are winsorised and used to construct a continuous measure of fiscal cyclicality intensity and a normalized Score index. The findings reveal substantial heterogeneity in fiscal cyclicality across EU Member States and over time, indicating a predominant countercyclical behaviour during significant macroeconomic shocks, while also demonstrating significant differences in the strength and stability of fiscal responses. Countercyclical observations account for 83.07% of the rolling-window estimates, compared with 11.82% procyclical and 5.11% acyclical observations. The additional robustness tests indicate that the main structure of the estimated coefficient series is preserved under alternative treatments of extreme observations, the exclusion of individual countries and the use of an earlier information set for the output gap. Analysing fiscal cyclicality solely through its direction therefore provides an incomplete representation of fiscal behaviour. The proposed framework extends the existing literature by simultaneously considering the direction, intensity and dynamics of fiscal cyclicality over time, providing a more comprehensive basis for comparative analysis of fiscal policy and future assessments of fiscal sustainability. For policymakers, the resulting Score provides an additional quantitative indicator for monitoring changes in the intensity of fiscal behaviour, and when considered jointly with the estimated coefficient, changes in its direction may complement existing assessments of fiscal policy within the European Semester and the European economic governance framework.