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Convergence of fiscal policies in the euro area

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  • De Bandt, Olivier
  • Mongelli, Francesco Paolo

Abstract

This paper aims at determining whether economic, financial and monetary integration on the one hand, and institutional factors on the other, may have led to gradual convergence in key fiscal variables across the euro area over the recent period, bringing fiscal positions closer together. The Maastricht convergence criteria have facilitated this process but we investigate here whether the structural factors bringing fiscal positions closer together have been a feature of European integration starting already in the 1970s. The alternative scenario is that the euro zone is still characterised by largely idiosyncratic national fiscal policies. Over the 1970-1998 period we run contemporaneous cross-correlation, dispersion and cointegration tests using annual data for government net lending, and total current revenue and expenditure to uncover common trends, as measures of fiscal convergence. We also investigate whether the short term fiscal position in a given country shares both a common euro area component and national features (i.e., idiosyncratic national cycles) using a dynamic factor analysis on quarterly data for the four largest euro area countries since 1985. We find convincing evidence that for euro area countries cross-correlation has increased steadily over the sample period and that fiscal dispersion has been declining at a sustained pace among all countries in the sample. There is evidence of cointegration across the euro area for several countries on the basis of total current revenue, and also for total current expenditure. However, when the series are corrected for the business cycle, cointegration is only accepted for net lending. There is clearly common fiscal cycles for net lending across the euro area that do not only express common business cycles. However, while countries have followed more similar policies in the 1990s in particular during the run-up to EMU, the timing of fiscal adjustment differed across countries. In addition, idiosyncratic components still contribute to a significant share of the variability of individual countries. JEL Classification: H60, E61, C22

Suggested Citation

  • De Bandt, Olivier & Mongelli, Francesco Paolo, 2000. "Convergence of fiscal policies in the euro area," Working Paper Series 0020, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20000020
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Monteforte, Libero, 2007. "Aggregation bias in macro models: Does it matter for the euro area?," Economic Modelling, Elsevier, vol. 24(2), pages 236-261, March.
    2. Fernando M. M. Ruiz, 2006. "Convergence de l'impôt sur les sociétés dans l'Union E uropéenne," Economie & Prévision, La Documentation Française, vol. 0(2), pages 79-96.
    3. Balogun, Emmanuel Dele, 2008. "An Empirical Test of Trade Gravity Model Criteria for the West African Monetary Zone (WAMZ)," MPRA Paper 7083, University Library of Munich, Germany.
    4. Dufrénot G. & Paul L., 2010. "Fiscal developments in the euro area beyond the crisis: some lessons drawn from fiscal reaction functions," Working papers 292, Banque de France.
    5. van Aarle, Bas & Garretsen, Harry, 2003. "Keynesian, non-Keynesian or no effects of fiscal policy changes? The EMU case," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 213-240, June.
    6. Coenen, Günter & Straub, Roland & Trabandt, Mathias, 2013. "Gauging the effects of fiscal stimulus packages in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 367-386.
    7. Herzog, Bodo, 2006. "Coordination of fiscal and monetary policy in CIS-countries: A theory of optimum fiscal area?," Research in International Business and Finance, Elsevier, vol. 20(2), pages 256-274, June.
    8. Tomat, Gian Maria, 2002. "Durable goods, price indexes and quality change: an application to automobile prices in Italy, 1988-1998," Working Paper Series 0118, European Central Bank.
    9. Afonso, António & Jalles, João Tovar, 2014. "Assessing fiscal episodes," Economic Modelling, Elsevier, vol. 37(C), pages 255-270.
    10. Criste, Adina, 2011. "Relevance Of The Optimum Currency Areas Model For The Process Of European Monetary Integration Within The New Context Of Crisis," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 15(4), pages 94-107.
    11. Sébastien Pommier, 2008. "The Use of Fiscal Policy in EMU: First Appraisal and Future Prospects," EKONOMIAZ. Revista vasca de Economía, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 28-45.
    12. Schalck, Christophe, 2012. "Investigating heterogeneity in European fiscal behaviours," Research in Economics, Elsevier, vol. 66(4), pages 383-390.

    More about this item

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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