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Fiscal Policy Effects in the European Union

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  • Andreas Thams

Abstract

This paper analyzes empirically the impact of fiscal policy on the price level for the cases of Germany and Spain. We investigate whether the fiscal theory of the price level (FTPL) is able to deliver a reasonable explanation for the different performances of the price level in these two countries during recent years. We apply two different approaches. The first is a Bayesian VAR model using sign restrictions to assess the relation between surpluses and public debt. Afterwards, we use a Bayesian regime-switching model to uncover changes in monetary and fiscal policy behavior. The analysis basically shows that in each of the two countries fiscal shocks have a significant impact on the price level. Nonetheless, the FTPL does not deliver a reasonable explanation for the differences in the pattern of inflation between the two countries.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-016.

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Length: 36 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-016

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Keywords: Fiscal theory; policy interaction; monetary policy; public debt; price level; Euro area;

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References

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  1. Willem H. Buiter, 1999. "The Fallacy of the Fiscal Theory of the Price Level," NBER Working Papers 7302, National Bureau of Economic Research, Inc.
  2. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1221-1238, December.
  3. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(4), pages 809-842, 06.
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  5. António Afonso, 2002. "Disturbing the Fiscal Theory of the Price Level: Can it Fit the EU-15," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2002/01, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper, Tilburg University, Center for Economic Research 1999-28, Tilburg University, Center for Economic Research.
  7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  8. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  9. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 43(1), pages 1-46, December.
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  11. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
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  14. Carlo Favero & Tommaso Monacelli, 2005. "Fiscal Policy Rules and Regime (In)Stability: Evidence from the U.S," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 282, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  16. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, Springer, vol. 4(3), pages 381-99.
  17. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  18. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
  19. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  20. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
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  22. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, Springer, vol. 4(3), pages 345-80.
  23. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
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Cited by:
  1. António Afonso & Peter Claeys & Ricardo M. Sousa, 2009. "Fiscal Regime Shifts in Portugal," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2009/39, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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