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Fiscal Policy and Monetary Integration in Europe: An Update

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  • Candelon, Bertrand
  • Muysken, Joan
  • Vermeulen, Robert

    (METEOR)

Abstract

By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy remains procyclical after 1992. This result contradicts the previous findings of Galí and Perotti (2003). It also appears that fiscal rules differ between large and small countries: especially large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy does exhibit different behaviour facing supply or demand constraints. The procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 050.

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Date of creation: 2007
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Handle: RePEc:unm:umamet:2007050

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Keywords: macroeconomics ;

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References

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  1. Fatás, Antonio & Mihov, Ilian, 2002. "The Case for Restricting Fiscal Policy Discretion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3277, C.E.P.R. Discussion Papers.
  2. Beetsma, Roel M. W. J. & Jensen, Henrik, 2004. "Mark-up fluctuations and fiscal policy stabilization in a monetary union," Journal of Macroeconomics, Elsevier, Elsevier, vol. 26(2), pages 357-376, June.
  3. Roberto Golinelli & Sandro Momigliano, 2006. "Real-time determinants of fiscal policies in the euro area: Fiscal rules, cyclical conditions and elections," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 609, Bank of Italy, Economic Research and International Relations Area.
  4. Jakob de Haan & Helge Berger & David-Jan Jansen, 2003. "The End of the Stability and Growth Pact?," CESifo Working Paper Series 1093, CESifo Group Munich.
  5. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3933, C.E.P.R. Discussion Papers.
  6. Hallerberg, Mark & Strauch, Rolf & von Hagen, Jürgen, 2004. "The design of fiscal rules and forms of governance in European Union countries," Working Paper Series, European Central Bank 0419, European Central Bank.
  7. von Hagen, Jürgen, 2005. "Fiscal Rules and Fiscal Performance in the EU and Japan," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5330, C.E.P.R. Discussion Papers.
  8. de Haan, Jakob & Berger, Helge & Jansen, David-Jan, 2003. "The end of stability and growth pact?," Discussion Papers 2003/16, Free University Berlin, School of Business & Economics.
  9. Wren-Lewis, Simon, 2000. "The Limits to Discretionary Fiscal Stabilization Policy," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 16(4), pages 92-105, Winter.
  10. Forni, Lorenzo & Momigliano, Sandro, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," MPRA Paper 4315, University Library of Munich, Germany.
  11. von Hagen, Jürgen, 2003. "Fiscal discipline and growth in Euroland: Experiences with the stability and growth pact," ZEI Working Papers B 06-2003, ZEI - Center for European Integration Studies, University of Bonn.
  12. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers, Centre for Economic Performance, LSE dp0007, Centre for Economic Performance, LSE.
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Citations

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Cited by:
  1. Paloviita, Maritta, 2012. "Real time uncertainty in fiscal planning and debt accumulation in the euro area," Research Discussion Papers, Bank of Finland 35/2012, Bank of Finland.
  2. Jacques Melitz & Julia Darby, 2011. "Joint Estimates of Automatic and Discretionary Fiscal Policy: The OECD 1981-2003," Working Papers, Centre de Recherche en Economie et Statistique 2011-11, Centre de Recherche en Economie et Statistique.
  3. Paloviita, Maritta, 2012. "Fiscal planning and implementation: euro area analysis based on real time data," Research Discussion Papers, Bank of Finland 34/2012, Bank of Finland.
  4. Athanasios Tagkalakis, 2012. "Fiscal policy and asset price volatility," Empirica, Springer, Springer, vol. 39(1), pages 123-156, February.
  5. Thushyanthan Baskaran & Zohal Hessami, 2011. "A Tale of Five PIIGS: Soft Budget Constraints and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2011-45, Department of Economics, University of Konstanz.
  6. Rilind Kabashi, 2014. "The Cyclical Character of Fiscal Policy in Transition Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 57-73.
  7. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
  8. Julia Bachtrögler & Harald Badinger & Aurélien Fichet de Clairfontaine & Wolf Heinrich Reuter, 2014. "Summarizing Data using Partially Ordered Set Theory: An Application to Fiscal Frameworks in 97 Countries," Department of Economics Working Papers wuwp181, Vienna University of Economics, Department of Economics.
  9. Stéphane Auray & Aurélien Eyquem, 2014. "Welfare Reversals in a Monetary Union," Working Papers, HAL halshs-00925589, HAL.
  10. Darby, Julia & Melitz, Jacques, 2011. "Joint estimates of automatic and discretionary fiscal policy for the OECD," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-43, Scottish Institute for Research in Economics (SIRE).
  11. Athanasios Tagkalakis, 2011. "Asset price volatility and government revenue," Working Papers, Bank of Greece 133, Bank of Greece.
  12. Tagkalakis, Athanasios, 2011. "Fiscal policy and financial market movements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(1), pages 231-251, January.
  13. Athanasios Tagkalakis, 2012. "The effects of financial crisis on fiscal positions," Working Papers, Bank of Greece 145, Bank of Greece.
  14. Stéphane Auray & Aurélien Eyquem, 2012. "Welfare Reversal in Monetary Union," Working Papers, Centre de Recherche en Economie et Statistique 2012-33, Centre de Recherche en Economie et Statistique.
  15. Nicolaas Groenewold, 2012. "Australia and the GFC: Saved by Astute Fiscal Policy?," Economics Discussion / Working Papers, The University of Western Australia, Department of Economics 12-28, The University of Western Australia, Department of Economics.
  16. Sanchit Arora & Claire Reicher, 2014. "Changes in the Response of Fiscal Policy to Monetary Policy in the EMU," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 465, Kiel Institute for the World Economy.
  17. Julia Darby & Jacques Melitz, 2011. "Joint estimates of automatic and discretionary fiscal policy for the OECD," Working Papers, University of Strathclyde Business School, Department of Economics 1122, University of Strathclyde Business School, Department of Economics.
  18. Dufrénot G. & Paul L., 2010. "Fiscal developments in the euro area beyond the crisis: some lessons drawn from fiscal reaction functions," Working papers, Banque de France 292, Banque de France.

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