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Discretionary Fiscal Policy in the EMU Context: An Empirical Approach (1981-2010) & the Recent Reform in European Governance

  • Dionysios K. Solomos
  • Dimitrios N. Koumparoulis
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    This paper attempts to investigate how the Maastricht criteria and the Stability and Growth Pact (SGP) have impaired the capacity of Euro Zone (EZ) national authorities to conduct discretionary fiscal policy. We estimate fiscal determinants for the structural (discretionary) public deficit over the period of 1981-2010, estimating panel data equations in order to increase the strength of the test by enhancing the time series dimension of the data by the cross section. We find that the degree of the countrecyclicality of discretionary fiscal policy has been reduced significantly after the Maastricht Treaty. Also, there is empirical evidence that national fiscal rules have a significant positive impact in budgetary outcomes. Regarding the recent reform of the European governance framework, we consider that the context of the reform seems incapable of dealing with the factors which are responsible for the sovereign debt crisis. We stress the need for reforms in the financial sector which seem necessary to ensure in association with sound fiscal policies the stability in euro area.

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    Article provided by European Research Studies Journal in its journal European Research Studies Journal.

    Volume (Year): XV (2012)
    Issue (Month): 2 ()
    Pages: 117-136

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    Handle: RePEc:ers:journl:v:xv:y:2012:i:2:p:117-136
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    1. Iara, Anna & Wolff, Guntram B., 2014. "Rules and risk in the Euro area," European Journal of Political Economy, Elsevier, vol. 34(C), pages 222-236.
    2. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
    3. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    4. repec:rwi:repape:0176 is not listed on IDEAS
    5. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    6. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
    7. Hallerberg, Mark & Strauch, Rolf & Hagen, Jürgen von, 2006. "The design of fiscal rules and forms of governance in European Union countries," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 150, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Papageorgiou, Theofanis & Michaelides, Panayotis G. & Milios, John G., 2010. "Business cycles synchronization and clustering in Europe (1960-2009)," Journal of Economics and Business, Elsevier, vol. 62(5), pages 419-470, September.
    9. Clemens Fuest, 2011. "Will the Reform of the Institutional Framework Restore Fiscal Stability in the Eurozone?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(2), pages 34-39, 07.
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