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Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model

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Author Info

  • Bruneau, C.
  • De Bandt, O.

Abstract

In order to assess the effect of fiscal rules in Stage Three of EMU for France and Germany, Bayoumi and Eichengreen's (1992) structural VAR analysis is extended by including the general government financial surplus and conditioning by external variables. This allows a distinction between fiscal and monetary shocks. During the period 1972.1-1995.4, monetary policy has a significant effect on prices in both countries. On the other hand, fiscal shocks, whose effect on the deficit provides a measure of the " structural deficit ", only contribute to a significant part of the dynamics of output in Germany. For that period, they appear to have little effect in France. In addition, fiscal shocks are uncorrelated between the two countries, although it is difficult to conclude that it reflects purely idiosyncratic shocks rather than a different policy-mix.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 60.

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Length: 35 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bfr:banfra:60

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Keywords: Budget deficit ; Ricardian equivalence ; Structural VAR ; EMU;

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References

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  1. Ahmed, Shaghil & Ickes, Barry W. & Ping Wang & Byung Sam Yoo, 1993. "International Business Cycles," American Economic Review, American Economic Association, vol. 83(3), pages 335-59, June.
  2. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  3. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  4. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  5. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
  6. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-44, September.
  7. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of Monetary Unification," Department of Economics, Working Paper Series qt791143kp, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Correia-Nunes, Jose & Stemitsiotis, Loukas, 1995. "Budget Deficit and Interest Rates: Is There a Link? International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 425-49, November.
  9. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  10. Mélitz, Jacques & Weber, Axel A, 1996. "The Costs/Benefits of a Common Monetary Policy in France and Germany and Possible Lessons for Monetary Union," CEPR Discussion Papers 1374, C.E.P.R. Discussion Papers.
  11. Sachs, Jeffrey, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 731-47, June.
  12. Issing,Otmar & Gaspar,Vitor & Angeloni,Ignazio & Tristani,Oreste, 2001. "Monetary Policy in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521783248, Fall.
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Citations

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Cited by:
  1. Artis, Michael J & Onorante, Luca, 2006. "The Economic Importance of Fiscal Rules," CEPR Discussion Papers 5684, C.E.P.R. Discussion Papers.
  2. van Aarle, Bas & Garretsen, Harry & Gobbin, Niko, 2003. "Monetary and fiscal policy transmission in the Euro-area: evidence from a structural VAR analysis," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 609-638.
  3. Camba-Méndez, Gonzalo & Lamo, Ana, 2002. "Short-term monitoring of fiscal policy discipline," Working Paper Series 0152, European Central Bank.
  4. De Bandt, Olivier & Mongelli, Francesco Paolo, 2000. "Convergence of fiscal policies in the euro area," Working Paper Series 0020, European Central Bank.
  5. Bruneau, C. & De Bandt, O., 1998. "La modélisation VAR structurel : application à la politique monétaire en France," Working papers 52, Banque de France.
  6. Weimann, Marco, 2002. "OCA theory and EMU eastern enlargement: An empirical application," Dresden Discussion Paper Series in Economics 07/02, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  7. Bofinger, Peter & Mayer, Eric, 2004. "The Stability and Growth Pact Time to Rebuild!," W.E.P. - Würzburg Economic Papers 56, University of Würzburg, Chair for Monetary Policy and International Economics.
  8. Signe Krogstrup, 2002. "Should We Pay Attention to Indicators of Fiscal Impact on Demand?," IHEID Working Papers 01-2002, Economics Section, The Graduate Institute of International Studies.

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