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The Effect of Fiscal Policy Asymmetries on Business Cycle Correlation in the EU

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  • Ladislava Issever Grochová

    (Faculty of Business and Economics, Mendel University in Brno)

  • Petr Rozmahel

    (Faculty of Business and Economics, Mendel University in Brno)

  • Marek Litzman

    (Faculty of Business and Economics, Mendel University in Brno)

Abstract

This paper reviews the role of bilateral fiscal differences, fiscal indiscipline and their joint effects in particular in determining business cycle synchronicity in the European Union (EU). Panel data comprising 28 EU members from 1999–2019 are used in the analysis. The two-step Instrumental Variable–Generalized Method of Moments (IV–GMM) is employed to estimate the effects of examined fiscal measures on business cycle correlations. The study finds that fiscal indiscipline doubles the negative effect of increasing fiscal differences on business cycle correlation compared to fiscally disciplined country-pairs. The findings suggest reopening the debate on fiscal policy coordination across Europe.

Suggested Citation

  • Ladislava Issever Grochová & Petr Rozmahel & Marek Litzman, 2022. "The Effect of Fiscal Policy Asymmetries on Business Cycle Correlation in the EU," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 69(3), pages 361-376, September.
    • Handle: RePEc:aic:saebjn:v:69:y:2022:i:3:p:361-376:n:6
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    References listed on IDEAS

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