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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 has remained 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; large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy exhibits different behaviour when facing supply or demand constraints. A 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 038.

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Date of creation: 2008
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Handle: RePEc:unm:umamet:2008038

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Keywords: Economics (Jel: A);

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  1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  2. Hallerberg, Mark & Strauch, Rolf & von Hagen, Jurgen, 2007. "The design of fiscal rules and forms of governance in European Union countries," European Journal of Political Economy, Elsevier, Elsevier, vol. 23(2), pages 338-359, June.
  3. 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.
  4. Lorenzo Forni & Sandro Momigliano, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 540, Bank of Italy, Economic Research and International Relations Area.
  5. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1419-1447, November.
  6. 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.
  7. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  8. Hagen, Jürgen von, 2006. "Fiscal Rules and Fiscal Performance in the EU and Japan," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 147, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  9. 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.
  10. Beetsma, Roel & Jensen, Henrik, 2003. "Mark-Up Fluctuations and Fiscal Policy Stabilization in a Monetary Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4020, C.E.P.R. Discussion Papers.
  11. J. de Haan & H. Berger & D. Jansen, 2003. "The end of the stability and growth pact?," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 748, Netherlands Central Bank, Research Department.
  12. 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.
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Cited by:
  1. 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.
  2. Tagkalakis, Athanasios, 2013. "The effects of financial crisis on fiscal positions," European Journal of Political Economy, Elsevier, Elsevier, vol. 29(C), pages 197-213.
  3. Julia Darby & Jacques Melitz, 2011. "Joint Estimates of Automatic and Discretionary Fiscal Policy: the OECD 1981-2003," Working Papers 2011-14, CEPII research center.
  4. Tagkalakis, Athanasios, 2011. "Asset price volatility and government revenue," Economic Modelling, Elsevier, Elsevier, vol. 28(6), pages 2532-2543.
  5. Athanasios Tagkalakis, 2010. "Fiscal policy and financial market movements," Working Papers, Bank of Greece 116, Bank of Greece.
  6. 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.
  7. 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.
  8. Stéphane Auray & Aurélien Eyquem, 2013. "Welfare Reversals in a Monetary Union," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1342, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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).
  15. 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.
  16. Athanasios Tagkalakis, 2012. "Fiscal policy and asset price volatility," Empirica, Springer, Springer, vol. 39(1), pages 123-156, February.
  17. 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.
  18. 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.

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