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Pushing the limit? Fiscal policy in the European Monetary Union

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  • Daniel, Betty C.
  • Shiamptanis, Christos

Abstract

Governments are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to GDP. These fiscal limits invalidate Bohn's criterion for fiscal sustainability, which allows explosive debt relative to GDP, eventually violating any fiscal limit. We derive restrictions on a fiscal rule, necessary for the government to eliminate explosive behavior. These restrictions require that the response of the primary surplus to debt be relatively strong, and that the primary surplus be cointegrated with both debt and output. We test these empirical implications for a panel of eleven EMU countries, and find that they are satisfied, implying that fiscal policy does not create explosive behavior.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 11 ()
Pages: 2307-2321

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:11:p:2307-2321

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Keywords: European Monetary Union; Fiscal policy; Fiscal limits; Panel cointegration; Error correction;

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Cited by:
  1. Christos Shiamptanis, 2014. "Risk Assessment Under A Nonlinear Fiscal Policy Rule," LCERPA Working Papers lm0063, Laurier Centre for Economic Research and Policy Analysis, revised Jun 2014.
  2. repec:wlu:lcerpa:wm0070 is not listed on IDEAS

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