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The Effect of Asymmetries in Fiscal Policy Conducts on Business Cycle Correlation in the EU. WWWforEurope Working Paper No. 62

Author

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  • Petr Rozmahel
  • Ladislava Issever Grochová
  • Marek Litzman

    (Mendel University in Brno)

Abstract

The paper examines the effects of asymmetries in fiscal policy conduct upon the correlation of business cycles in the European Union. In particular it estimates the effects of fiscal indiscipline and dissimilarity on business cycle correlation in the period 1996-2012 using a panel of 27 EU countries. The paper pays special attention to Central and Eastern European countries and examines the effects of interactions between fiscal policy measures and the fact that the country has not yet adopted the Euro. The results show a significant and robust negative effect of fiscal indiscipline and dissimilarity upon business cycle correlation in the EU. The paper also provides some evidence for the significance of intra-industry trade as well as of the interactions between fiscal measures and non-Euro area membership. The study provides arguments for fiscal policy harmonisation and fiscal discipline of the Euro area member as well as acceding countries, as undisciplined and dissimilar fiscal policies are shown as sources of business cycle deviations from the average European cycle.

Suggested Citation

  • Petr Rozmahel & Ladislava Issever Grochová & Marek Litzman, 2014. "The Effect of Asymmetries in Fiscal Policy Conducts on Business Cycle Correlation in the EU. WWWforEurope Working Paper No. 62," WIFO Studies, WIFO, number 47249, July.
  • Handle: RePEc:wfo:wstudy:47249
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    References listed on IDEAS

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