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EMU and the Cyclical Behavior of Fiscal Policy: A Suggested Interpretation

Author

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  • Oliver Landmann

    (Institute for Economic Research, University of Freiburg)

Abstract

Fiscal policy is widely criticized for its failure to act as a stabilizing countercyclical force in the European Monetary Union. Two periods should be distinguished: Prior to the Financial Crisis of 2008, when monetary policy had traction to pursue stability for the aggregate eurozone, fiscal policies failed to contain macroeconomic divergence across the currency area. After the crisis, when interest rates had hit the zero lower bound, widespread fiscal austerity ex‐acerbated the persistent recession. The paper proposes a minimal model of decentralized fiscal policymaking in a monetary union. The model is used to interpret policy behavior in both periods. The analysis points to a pro‐cyclical bias and suggests a need for coordination.

Suggested Citation

  • Oliver Landmann, 2014. "EMU and the Cyclical Behavior of Fiscal Policy: A Suggested Interpretation," Discussion Paper Series 29, Department of International Economic Policy, University of Freiburg, revised Aug 2014.
    • Handle: RePEc:fre:wpaper:29
    as

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    File URL: https://www.iep.uni-freiburg.de/discussion-papers/repec/fre/wpaper/files/dp29_emu_cyclical_behavior_fiscal_policy.pdf
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    References listed on IDEAS

    as
    1. Antonio Fatás & Ilian Mihov, 2010. "The Euro and Fiscal Policy," NBER Chapters, in: Europe and the Euro, pages 287-324, National Bureau of Economic Research, Inc.
    2. Acemoglu, Daron & Parker, Jonathan A. & Woodford, Michael (ed.), 2013. "NBER Macroeconomics Annual 2012," National Bureau of Economic Research Books, University of Chicago Press, number 9780226052779, July.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Noted for Your Nighttime Procrastination for January 14, 2015
      by J. Bradford DeLong in Grasping Reality with the Invisible Hand on 2015-01-15 07:13:41

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    Cited by:

    1. Chortareas, Georgios & Mavrodimitrakis, Christos, 2016. "Can monetary policy fully stabilize pure demand shocks in a monetary union with a fiscal leader?," Economic Modelling, Elsevier, vol. 54(C), pages 463-468.

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    More about this item

    Keywords

    Fiscal Policy; Monetary Union; Multiplier; International Policy Coordination; Monetary‐Fiscal Policy Interaction;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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