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Has the Stability and Growth Pact Made Fiscal Policy More Pro-Cyclical?

  • Jacopo Cimadomo

The Stability and Growth Pact has recently been under close examination on the grounds that, rather than being associated with a neutral fiscal policy stance over the business cycle, it may have induced pro-cyclicality during downturns while also being unable to curb loose policies under buoyant economic conditions. However, the existing empirical literature does not find strong support to these arguments. By focusing on the euro area and on those phases of the economic cycle in which swings are particularly strong, it is found here that fiscal policy seems to have been neutral both in mild and severe recessions. In contrast, during upturns and from 1999 onwards, i.e. since the introduction of the Pact, a pro-cyclical bias is at play when economic conditions are particularly favourable. Nevertheless, this occurs also in other industrialised countries. Hence, the surge of pro-cyclicality cannot be associated directly with the adoption of the EU fiscal framework.

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Article provided by CEPII research center in its journal La Lettre du CEPII.

Volume (Year): (2005)
Issue (Month): 247 ()
Pages:

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Handle: RePEc:cii:cepill:2005-247
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