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'1 Market + 1 (Tight) Money = 2 Rules of Fiscal Discipline' : Europe's Fiscal Stance deserves Another Look

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  • DREZE , Jacques H.

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

It is argued that the aggregate fiscal stance of EC 12 is a significant determinant of output and employment in the Community, it deserves more attention, and a different attention, than it received in Maastricht. The significance of aggregate demand is illustrated by the econometric evidence from the European Unemployment Program (EUP) and from simulations of the COMPACT and QUEST models. The conditions for effectiveness and efficiency of fiscal policy are discussed. Effectiveness requires EC-lelev coordination, and parallel supply-side measures of wage moderation and monetary accomodation -i.e a two-handed approach. Combining the EUP macroeconomic framework with the CAPM pricing of risks, it is shown that efficiency of fiscal stimulation requires a faster development of aggregate demand than of aggregate supply, with an allowance for risk proportional to the expected growth rate aggregate output.

Suggested Citation

  • DREZE , Jacques H., 1992. "'1 Market + 1 (Tight) Money = 2 Rules of Fiscal Discipline' : Europe's Fiscal Stance deserves Another Look," LIDAM Discussion Papers CORE 1992063, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:1992063
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