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Towards expenditure rules and fiscal sanity in the euro area

Author

Listed:
  • Hauptmeier, Sebastian
  • Sanchez Fuentes, Jesus
  • Schuknecht, Ludger

Abstract

The study looks at primary expenditure developments in the euro area, its three largest members and four “macro-imbalances” countries for the period 1999-2009. It compares actual expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. It also calculates the implications for debt trends. It finds that, all sample countries except Germany applied expansionary expenditure policies. This resulted in much higher expenditure and debt paths compared to a counterfactual neutral expenditure stance. Simple and prudent rules-based spending policies could have led to much safer fiscal positions much more in line with the EU’s Stability and Growth Pact rules. JEL Classification: E17, E61, E65, H50, H60

Suggested Citation

  • Hauptmeier, Sebastian & Sanchez Fuentes, Jesus & Schuknecht, Ludger, 2010. "Towards expenditure rules and fiscal sanity in the euro area," Working Paper Series 1266, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101266
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    References listed on IDEAS

    as
    1. Jacopo Cimadomo, 2012. "Fiscal Policy in Real Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 440-465, June.
    2. Menguy, Séverine, 2008. "A dynamic rule applied to the threshold imposed on the European budgetary deficits," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1093-1105.
    3. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
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    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, April.
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    8. Peter Wierts, 2008. "How do Expenditure Rules affect Fiscal Behaviour?," DNB Working Papers 166, Netherlands Central Bank, Research Department.
    9. Holm-Hadulla, Fédéric & Hauptmeier, Sebastian & Rother, Philipp, 2010. "The impact of numerical expenditure rules on budgetary discipline over the cycle," Working Paper Series 1169, European Central Bank.
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    Citations

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    Cited by:

    1. Kerber Markus C., 2012. "Spielmacher der Wettbewerbsverfälschung? Anmerkungen zur Rolle der EZB auf den Kapitalmärkten / The Distortion of Competition organised by Central Banks. Comments on the role of ECB on capital markets," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 63(1), pages 63-84, January.
    2. Sacchi, Agnese & Salotti, Simone, 2015. "The impact of national fiscal rules on the stabilisation function of fiscal policy," European Journal of Political Economy, Elsevier, vol. 37(C), pages 1-20.
    3. António Afonso & Ana Sofia Guimarães, 2014. "The relevance of fiscal rules for fiscal and yield developments," Working Papers Department of Economics 2014/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    4. Landon, Stuart & Smith, Constance, 2017. "Does the design of a fiscal rule matter for welfare?," Economic Modelling, Elsevier, vol. 63(C), pages 226-237.
    5. repec:ces:ifodic:v:9:y:2011:i:3:p:16750160 is not listed on IDEAS
    6. Artzrouni, Marc & Tramontana, Fabio, 2013. "The debt trap: a two-compartment train wreck," MPRA Paper 47578, University Library of Munich, Germany.
    7. Ludger Schuknecht & Philippe Moutot & Philipp Rother & Jürgen Stark, 2011. "The Stability and Growth Pact: Crisis and Reform," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(3), pages 10-17, October.
    8. Sebastian Hauptmeier & A. Jesús Sánchez Fuentes & Ludger Schuknecht, 2015. "Spending Dynamics in Euro Area Countries: Composition and Determinants," Hacienda Pública Española, IEF, vol. 215(4), pages 119-138, December.
    9. Evan Lau & Ahmad Zubaidi Baharumshah & Soon, 2013. "The behavior of external debt in Asian countries: evidence based on panel unit root tests," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(sup1), pages 377-394, June.
    10. Mencinger, Jernej & Aristovnik, Aleksander, 2013. "Fiscal Policy Stance in the European Union: The Impact of the Euro," MPRA Paper 44708, University Library of Munich, Germany.
    11. Jerome Creel & Paul Hubert & Francesco Saraceno, 2012. "An assessment of Stability and Growth Pact Reform Proposals in a Small-Scale Macro Framework," Documents de Travail de l'OFCE 2012-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    12. Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2013. "Are government wages interlinked with private sector wages?," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 697-712.
    13. Ermal Hitaj & Yasin Kursat Onder, 2013. "Fiscal Discipline in WAEMU; Rules, Institutions, and Markets," IMF Working Papers 13/216, International Monetary Fund.
    14. Anderson, Derek & Hunt, Benjamin & Snudden, Stephen, 2014. "Fiscal consolidation in the euro area: How much pain can structural reforms ease?," Journal of Policy Modeling, Elsevier, vol. 36(5), pages 785-799.
    15. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.
    16. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j0h0g8tgo is not listed on IDEAS
    17. Bermingham, Colin & Conefrey, Thomas, 2014. "The Irish macroeconomic response to an external shock with an application to stress testing," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 454-470.
    18. Ludger Schuknecht, 2013. "Has Public Insurance Gone Too Far?," CESifo Working Paper Series 4217, CESifo Group Munich.
    19. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
    20. Matthias Bauer, 2013. "Political Aversion To a Multilateral Fiscal Rule: The Dynamic Commitment Problem in European Fiscal Governance," Global Financial Markets Working Paper Series 44-2013, Friedrich-Schiller-University Jena.
    21. Artzrouni, Marc & Tramontana, Fabio, 2014. "The debt trap: A two-compartment train wreck… and how to avoid it," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 241-256.
    22. Ludger Schuknecht & Philippe Moutot & Philipp Rother & Jürgen Stark, 2011. "The Stability and Growth Pact: Crisis and Reform," CESifo DICE Report, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(3), pages 10-18, October.
    23. Trachanas, Emmanouil & Katrakilidis, Constantinos, 2013. "Fiscal deficits under financial pressure and insolvency: Evidence for Italy, Greece and Spain," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 730-749.
    24. Creel, Jérôme & Hubert, Paul & Saraceno, Francesco, 2013. "An assessment of the Stability and Growth Pact reform in a small-scale macro-framework," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1567-1580.

    More about this item

    Keywords

    Expenditure policies; expenditure rules; fiscal stance; public debt; sustainability;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

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