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Fiscal Policy Effects in the European Union

  • Andreas Thams

This paper analyzes empirically the impact of fiscal policy on the price level for the cases of Germany and Spain. We investigate whether the fiscal theory of the price level (FTPL) is able to deliver a reasonable explanation for the different performances of the price level in these two countries during recent years. We apply two different approaches. The first is a Bayesian VAR model using sign restrictions to assess the relation between surpluses and public debt. Afterwards, we use a Bayesian regime-switching model to uncover changes in monetary and fiscal policy behavior. The analysis basically shows that in each of the two countries fiscal shocks have a significant impact on the price level. Nonetheless, the FTPL does not deliver a reasonable explanation for the differences in the pattern of inflation between the two countries.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2006-016.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-016.

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Length: 36 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-016
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  1. Francisco de Castro, 2003. "The macroeconomic effects of fiscal policy in Spain," Banco de Espa�a Working Papers 0311, Banco de Espa�a.
  2. W.H. Buiter, 2000. "The Fallacy of the Fiscal Theory of the Price Level," CEP Discussion Papers dp0447, Centre for Economic Performance, LSE.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  4. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  5. António Afonso, 2002. "Disturbing the fiscal theory of the price level: Can it fit the eu-15?," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-3, International Conferences on Panel Data.
  6. Troy Davig & Eric M. Leeper & Hess Chung, 2004. "Monetary and Fiscal Policy Switching," NBER Working Papers 10362, National Bureau of Economic Research, Inc.
  7. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
  8. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  9. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  10. Carlo Favero & Tommaso Monacelli, 2005. "Fiscal Policy Rules and Regime (In)Stability: Evidence from the U.S," Working Papers 282, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. John H. Cochrane, 1998. "A Frictionless View of U.S. Inflation," NBER Working Papers 6646, National Bureau of Economic Research, Inc.
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  13. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  14. repec:cup:etheor:v:10:y:1994:i:3-4:p:645-71 is not listed on IDEAS
  15. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  16. Uhlig, Harald, 1994. "What Macroeconomists Should Know about Unit Roots: A Bayesian Perspective," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 645-671, August.
  17. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  18. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  19. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  20. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  21. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  22. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  23. John H. Cochrane, 2000. "Money as Stock: Price Level Determination with no Money Demand," NBER Working Papers 7498, National Bureau of Economic Research, Inc.
  24. Carmen Díaz-Roldán & Alberto Montero Soler, . "Monetary policy rules, credibility and inflation: The Spanish experience," Studies on the Spanish Economy 209, FEDEA.
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