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Fiscal Discipline before and after EMU - Permanent Weight Loss or Crash Diet?

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  • Andrew Hughes Hallett

    ()
    (Department of Economics, Vanderbilt University)

  • John Lewis

    (Tallinn Technical University and Bank of Estonia)

Abstract

This paper studies the evolution of European fiscal policies and the attempts at budgetary consolidation through three periods: the pre-Maastricht phase (to 1991); the run up to monetary union (1992-97), and finally the stability pact phase (1998 onwards). Using three separate indicators Ð the probability of undertaking a consolidation, the degree to which it is sustained, and the probability of exceeding a specified deficit limit Ð we search for structural breaks which could signify a change in the average level of fiscal discipline in these periods. We find increased discipline only up to 1997. Thereafter discipline erodes to the extent that, by 2005, there is less discipline than before the Maastricht process started. We conclude the new fiscal discipline was temporary; a product of the sanction of being denied entry to the Euro, and that EMU itself has had no impact on discipline (in the absence of that sanction). Our methodological innovation is to show the importance of the dynamics of fiscal behaviour: step dummies for changes in the average level of discipline, and trend dummies to capture any decline/increase relative to that average. A single structural break test will miss these dynamic effects, and may generate the erroneous conclusion that fiscal discipline had tightened since the start of phase two of EMU.

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File URL: http://www.accessecon.com/pubs/VUECON/vu05-w16.pdf
File Function: First version, 2005
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0516.

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Date of creation: May 2005
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Handle: RePEc:van:wpaper:0516

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Fiscal consolidation; probit regressions; dynamic structural breaks;

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References

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  1. repec:fth:coluec:754 is not listed on IDEAS
  2. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
  3. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  4. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
  5. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," NBER Working Papers 5730, National Bureau of Economic Research, Inc.
  6. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries," IMF Working Papers 96/70, International Monetary Fund.
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Cited by:
  1. John Lewis, 2013. "Fiscal policy in Central and Eastern Europe with real time data: cyclicality, inertia and the role of EU accession," Applied Economics, Taylor & Francis Journals, vol. 45(23), pages 3347-3359, August.
  2. Peter Wierts, 2007. "The sustainability of euro area debt: a re-assessment," DNB Working Papers 134, Netherlands Central Bank, Research Department.
  3. Hughes Hallett, Andrew & Scott, Drew, 2010. "Scotland: A New Fiscal Settlement," SIRE Discussion Papers 2010-23, Scottish Institute for Research in Economics (SIRE).
  4. Arghyrou, Michael G & Gadea, Maria Dolores, 2008. "The single monetary policy and domestic macro-fundamentals: Evidence from Spain," Cardiff Economics Working Papers E2008/23, Cardiff University, Cardiff Business School, Economics Section.
  5. Marcos Poplawski Ribeiro, 2009. "New Evidence on the Effectiveness of Europe's Fiscal Restrictions," Working Papers 2009-13, CEPII research center.
  6. Philipp Paulus, 2006. "The final blow to the Stability Pact? EMU enlargement and government debt," Otto-Wolff-Institut Discussion Paper Series 03/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
  7. Bernadeta Baran, 2012. "Effectiveness of Fiscal Policy Coordination Rules in the Monetary Union," Equilibrium, Uniwersytet Mikolaja Kopernika, vol. 7, pages 73-91.

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