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The stability and growth pact, fiscal policy institutions and stabilization in Europe

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  • Carlos Marinheiro

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Abstract

Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP as always being accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries after the Maastricht Treaty. This paper concludes that this conclusion resists to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to a decrease in the use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999-2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in the forecast of the output gap, and not the result of a change in the intentions of policy makers. As a result, there is no evidence in favour of the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policy.

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Bibliographic Info

Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 5 (2008)
Issue (Month): 1 (July)
Pages: 189-207

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Handle: RePEc:kap:iecepo:v:5:y:2008:i:1:p:189-207

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Web page: http://www.springerlink.com/link.asp?id=111059

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Keywords: Fiscal policy; Stabilization; Stability and growth pact; Institutional arrangements; Real-time data; E62; H62;

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  1. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
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  3. Lars Jonung & Martin Larch, 2004. "Improving fiscal policy in the EU: the case for independent forecasts," European Economy - Economic Papers 210, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Volkerink, Bjorn & De Haan, Jakob, 2001. " Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, vol. 109(3-4), pages 221-42, December.
  5. Lorenzo Forni & Sandro Momigliano, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," Temi di discussione (Economic working papers) 540, Bank of Italy, Economic Research and International Relations Area.
  6. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  7. Brender, Adi & Drazen, Allan, 2005. "Political budget cycles in new versus established democracies," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1271-1295, October.
  8. Jochen Mierau & Richard Jong-A-Pin & Jakob de Haan, 2007. "Do political variables affect fiscal policy adjustment decisions? New empirical evidence," Public Choice, Springer, vol. 133(3), pages 297-319, December.
  9. Athanasios Orphanides & Simon Van_Norden, 2000. "The Reliability of Output Gap Estimates in Real Time," Econometric Society World Congress 2000 Contributed Papers 0768, Econometric Society.
  10. Alan Auerbach, 2002. "Is There a Role for Discretionary Fiscal Policy?," NBER Working Papers 9306, National Bureau of Economic Research, Inc.
  11. Carlos Marinheiro, 2003. "Output Smoothing in EMU and OECD: Can We Forego Government Contribution? A risk sharing approach," GEMF Working Papers 2003-02, GEMF - Faculdade de Economia, Universidade de Coimbra.
  12. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  13. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
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Cited by:
  1. Jeffrey A. Frankel & Jesse Schreger, 2012. "Over-optimistic Official Forecasts in the Eurozone and Fiscal Rules," NBER Working Papers 18283, National Bureau of Economic Research, Inc.
  2. Beetsma, Roel & Giuliodori, Massimo & Walschot, Mark & Wierts, Peter, 2013. "Fifty years of fiscal planning and implementation in the Netherlands," European Journal of Political Economy, Elsevier, vol. 31(C), pages 119-138.
  3. Jacopo Cimadomo, 2011. "Real-time data and fiscal policy analysis: a survey of the literature," Working Papers 11-25, Federal Reserve Bank of Philadelphia.
  4. Jeffrey Frankel & Jesse Schreger, . "Over-optimistic official forecasts and fiscal rules in the eurozone," Working Paper 83166, Harvard University OpenScholar.
  5. Jeffrey Frankel, 2011. "A Solution to Fiscal Procyclicality: the Structural Budget Institutions Pioneered by Chile," Working Papers Central Bank of Chile 604, Central Bank of Chile.
  6. Frankel, Jeffrey, 2011. "A Solution to Overoptimistic Forecasts and Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile," Working Paper Series 11-012, Harvard University, John F. Kennedy School of Government.
  7. Kester Guy & Anton Belgrave, 2012. "Fiscal Multiplier in Microstates: Evidence from the Caribbean," International Advances in Economic Research, Springer, vol. 18(1), pages 74-86, February.
  8. Roel Beetsma & Benjamin Bluhm & Massimo Giuliodori & Peter Wierts, 2011. "From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU," Tinbergen Institute Discussion Papers 11-080/2, Tinbergen Institute.
  9. Carlos Fonseca Marinheiro, 2010. "Fiscal sustainability and the accuracy of macroeconomic forecasts: do supranational forecasts rather than government forecasts make a difference?," GEMF Working Papers 2010-07, GEMF - Faculdade de Economia, Universidade de Coimbra.

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