HOOVERISM, HYPERSTABILISATION OR HALFWAY-HOUSE? DESCRIBING FISCAL POLICY IN ESTONIA 1996-2003 Rasmus Kattai, John Lewis October 2004 Working Papers of Eesti Pank No 4, 2004

This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in out-put and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We estimate such a rule for Estonia using data from 1996-2003. We find no evidence of a systematic expansionary, or deflationary bias in fiscal policy.
Recovered preference parameters imply behaviour consistent with roughly equal weights given to output and budget stability. We find that for every 1 kroon shock to output there is an offsetting fiscal policy response of around 51 sents.
JEL Code: E61, E62
Key words: Fiscal Policy, Fiscal Policy Rules, Automatic Stabilisers, Output Stabilisation, Estonia

Authors' e-mail addresses: rasmus.kattai@epbe.ee, jlewis@epbe.ee

The views expressed are those of the authors and do not necessarily represent the official view of the Bank.

Contents

1. Introduction

2. Deriving a Simple Fiscal Policy Measure

2.1. Hooverism

2.2. Hyperstabilisation

2.3. Halfway-House

2.4. Graphical Analysis

2.5. Other Objectives for Fiscal Policy

3. Analysing Fiscal Policy in Estonia

4. Conclusions

Hooverism, Hyperstabilisation or Halfway-House? Describing Fiscal Policy in Estonia 1996-2003, Working Papers of Eesti Pank No 4, 2004 (PDF*)

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