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Discretionary Fiscal Policy in the EMU Context: An Empirical Approach (1981-2010) & the Recent Reform in European Governance

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  • Dionysios K. Solomos
  • Dimitrios N. Koumparoulis
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    Abstract

    This paper attempts to investigate how the Maastricht criteria and the Stability and Growth Pact (SGP) have impaired the capacity of Euro Zone (EZ) national authorities to conduct discretionary fiscal policy. We estimate fiscal determinants for the structural (discretionary) public deficit over the period of 1981-2010, estimating panel data equations in order to increase the strength of the test by enhancing the time series dimension of the data by the cross section. We find that the degree of the countrecyclicality of discretionary fiscal policy has been reduced significantly after the Maastricht Treaty. Also, there is empirical evidence that national fiscal rules have a significant positive impact in budgetary outcomes. Regarding the recent reform of the European governance framework, we consider that the context of the reform seems incapable of dealing with the factors which are responsible for the sovereign debt crisis. We stress the need for reforms in the financial sector which seem necessary to ensure in association with sound fiscal policies the stability in euro area.

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    Bibliographic Info

    Article provided by European Research Studies Journal in its journal European Research Studies Journal.

    Volume (Year): XV (2012)
    Issue (Month): 2 ()
    Pages: 117-136

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    Handle: RePEc:ers:journl:v:xv:y:2012:i:2:p:117-136

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    Web page: http://www.ersj.eu/

    Related research

    Keywords: Fiscal Policy; Discretionarity; Countercyclicality; Flexibitlity; Stability and Growth Pact; Business Cycle; National Fiscal Rules; Sustainability; Fiscal Discipline;

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    References

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    1. Hallerberg, Mark & Strauch, Rolf & von Hagen, Jürgen, 2004. "The design of fiscal rules and forms of governance in European Union countries," Working Paper Series, European Central Bank 0419, European Central Bank.
    2. Papageorgiou, Theofanis & Michaelides, Panayotis G. & Milios, John G., 2010. "Business cycles synchronization and clustering in Europe (1960-2009)," Journal of Economics and Business, Elsevier, Elsevier, vol. 62(5), pages 419-470, September.
    3. Ansgar Belke & Holger Zemanek & Gunther Schnabl, 2010. "Current Account Balances and Structural Adjustment in the Euro Area," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0176, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    5. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers, Bruegel 615, Bruegel.
    6. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
    7. Clemens Fuest, 2011. "Will the Reform of the Institutional Framework Restore Fiscal Stability in the Eurozone?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 12(2), pages 34-39, 07.
    8. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
    9. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(2), pages 249-272, April.
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