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The Euro and Fiscal Policy

In: Europe and the Euro

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  • Antonio Fatás
  • Ilian Mihov

Abstract

The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.

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This chapter was published in:

  • Alberto Alesina & Francesco Giavazzi, 2010. "Europe and the Euro," NBER Books, National Bureau of Economic Research, Inc, number ales08-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11656.

    Handle: RePEc:nbr:nberch:11656

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    1. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    2. Craig Burnside & Martin Eichenbaum & Jonas D.M. Fisher, 2000. "Assessing the Effects of Fiscal Shocks," NBER Working Papers 7459, National Bureau of Economic Research, Inc.
    3. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 533-572, October.
    4. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
    5. Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What Are the Stylized Facts?," CESifo Working Paper Series 459, CESifo Group Munich.
    6. Alan J. Auerbach & Daniel Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," NBER Working Papers 7662, National Bureau of Economic Research, Inc.
    7. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
    8. Xavier Debrun & Jean Pisani-Ferry & André Sapir, 2008. "Government size and output volatility: should we forsake automatic stabilisation?," Working Papers 47, Bruegel.
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    10. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1.
    11. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
    12. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November.
    13. Douglas W. Elmendorf & N. Gregory Mankiw, 1998. "Government debt," Finance and Economics Discussion Series 1998-09, Board of Governors of the Federal Reserve System (U.S.).
      • Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    14. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
    15. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
    16. Jacques Melitz, 2005. "Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD," Working Papers 2005-10, Centre de Recherche en Economie et Statistique.
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    18. Jean Pisani-Ferry & Xavier Debrun & André Sapir, 2008. "Government Size and Output Volatility," IMF Working Papers 08/122, International Monetary Fund.
    19. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
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    21. Buiter, Willem H & Grafe, Clemens, 2002. "Patching up the Pact: some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union," CEPR Discussion Papers 3496, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Philip Lane, 2010. "International Differences in Fiscal Policy During the Global Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp336, IIIS.
    2. Cerón, Juan A., 2012. "La respuesta de la política fiscal a la actividad económica en los países desarrollados/Fiscal policy reaction to economic activity in developed countries," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 369 (32 pag, Abril.
    3. Legrenzi, Gabriella & Milas, Costas, 2013. "Modelling the fiscal reaction functions of the GIPS based on state-varying thresholds," Economics Letters, Elsevier, vol. 121(3), pages 384-389.
    4. Mayer, Eric & Rüth, Sebastian & Scharler, Johann, 2013. "Government debt, inflation dynamics and the transmission of fiscal policy shocks," Economic Modelling, Elsevier, vol. 33(C), pages 762-771.
    5. Marcos Poplawski Ribeiro, 2009. "New Evidence on the Effectiveness of Europe's Fiscal Restrictions," Working Papers 2009-13, CEPII research center.
    6. Xavier Debrun & Radhicka Kapoor, 2010. "Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(2), pages 69–101, July.
    7. Agnello, Luca & Cimadomo, Jacopo, 2009. "Discretionary Fiscal Policies over the Cycle: New Evidence based on the ESCB Disaggregated Approach," Working Paper Series 1118, European Central Bank.
    8. Pedro Leão, 2012. "How to make discretionary fiscal policy countercyclical," Working Papers Department of Economics 2012/02, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
    9. Canale, Rosaria Rita & Napolitano, Oreste, 2009. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 20207, University Library of Munich, Germany.
    10. Landais, Bernard, 2011. "Conduite et efficacité de la politique économique : les leçons de la crise
      [Management and Efficiency of the Economic Policies : The Crisis' Lessons"]
      ," MPRA Paper 31223, University Library of Munich, Germany.
    11. Bénétrix, Agustín S. & Lane, Philip R., 2013. "Fiscal cyclicality and EMU," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 164-176.
    12. Håvard Halland & Michael Bleaney, . "Explaining The Procyclicality of Fiscal Policy in Developing Countries," Discussion Papers 11/09, University of Nottingham, CREDIT.
    13. Rilind Kabashi, 2014. "The Cyclical Character of Fiscal Policy in Transition Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 57-73.
    14. Magdalena RĂDULESCU, 2011. "The Efficiency of the Fiscal Policy in the EU and Its Role in the Economic Recovery by Attracting FDIs," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 1(7), pages 23, December.

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