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Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited

Author

Listed:
  • Servaas Deroose
  • Martin Larch
  • Andrea Schaechter

Abstract

It is often argued that fiscal stabilisation in the euro area compares unfavourably with the US, not least because of the perceived limitations of the Stability and Growth Pact. This paper qualifies this perception by taking a closer look at fiscal policy making since the mid-1990s. It examines a number of elements which are generally overlooked or not considered in the analysis of fiscal stabilisation. In particular, on top of discretionary fiscal policy, which generally is at the core of existing studies, it also takes into account the size of automatic stabilisers. Moreover, it considers the difference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasons for the gap between the two. On the basis of such a more comprehensive analysis, fiscal stabilisation in the euro area appears less dire than commonly assumed. It also suggests a number of points on how to improve the track record, including by strengthening fiscal governance.

Suggested Citation

  • Servaas Deroose & Martin Larch & Andrea Schaechter, 2008. "Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited," European Economy - Economic Papers 2008 - 2015 353, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0353
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    Cited by:

    1. Markus Eller & Jarko Fidrmuc & Zuzana Fungáčová, 2016. "Fiscal Policy and Regional Output Volatility: Evidence from Russia," Regional Studies, Taylor & Francis Journals, vol. 50(11), pages 1849-1862, November.
    2. Alcidi, Cinzia & Thirion, Gilles, 2017. "Fiscal Risk Sharing and Resilience to Shocks: Lessons for the euro area from the US," CEPS Papers 12595, Centre for European Policy Studies.
    3. Jan Veld & Martin Larch & Marieke Vandeweyer, 2013. "Automatic Fiscal Stabilisers: What They Are and What They Do," Open Economies Review, Springer, vol. 24(1), pages 147-163, February.
    4. van Riet, Ad, 2010. "Euro area fiscal policies and the crisis," Occasional Paper Series 109, European Central Bank.
    5. 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.
    6. Rilind Kabashi, 2014. "The Cyclical Character of Fiscal Policy in Transition Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 57-73.
    7. Luc Eyraud & Mr. Tao Wu, 2015. "Playing by the Rules: Reforming Fiscal Governance in Europe," IMF Working Papers 2015/067, International Monetary Fund.

    More about this item

    Keywords

    Fiscal policy; fiscal stabilisation; euro area; automatic stabilisers; output gap; Deroose; Larch ; Schaechter;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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