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Fiscal and monetary policy, unfortunate events, and the SGP arithmetics - Evidence from a growth-gaps model

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  • Edoardo Gaffeo
  • Giuliana Passamani
  • Roberto Tamborini

    ()

Abstract

The recent revision (March 2005) of the Stability and Growth Pact (SGP) has confirmed the 3% deficit/GDP ratio as the pillar of the excessive deficits procedure envisaged by the Maastricht Treaty for member countries of the EMU. Since the deficit/GDP ceiling is still in place, research on its implications for fiscal discipline and macroeconomic stabilization has to be pushed further. We argue that the agenda largely involves empirical matters. In particular, this paper presents an econometric estimate and simulations of a macroeconomic model of Italy and Germany aimed at addressing three issues. First, monetary and fiscal rules intercations are explictly modelled and examined in dynamic setting. Second, consistently with common perception and the new formulation of the SGP, the business cycle and the responses of policy variables are cast in terms of growth gaps, not gaps in levels, with respect to potential. Third, budgetary components (primary expenditure and total tax revenue) are examined as separate fiscal rules, which allows us to track the reaction of the fiscal stance to growth shocks more precisely, to point out several pitfalls in current measures of fiscal ratios to GDP, and suggest more accurate assessment of fiscal stances.

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Bibliographic Info

Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 0519.

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Date of creation: 2005
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Handle: RePEc:trn:utwpde:0519

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Keywords: Fiscal policy; Stability and Growth Pact;

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  1. 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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  14. Buti, M. & Eijffinger, S.C.W. & Franco, D., 2005. "The Stability pact Pains: A Forward-Looking Assessment of the Reform Debate," Discussion Paper 2005-101, Tilburg University, Center for Economic Research.
  15. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
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