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The Euro and Fiscal Policy

  • Antonio Fatas
  • Ilian Mihov

The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14722.

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Date of creation: Feb 2009
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Publication status: published as The Euro and Fiscal Policy , Antonio Fatás, Ilian Mihov. in Europe and the Euro , Alesina and Giavazzi. 2010
Handle: RePEc:nbr:nberwo:14722
Note: ME PE
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  1. Jacques Melitz, 2005. "Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD," Working Papers 2005-10, Centre de Recherche en Economie et Statistique.
  2. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
  3. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
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  5. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  6. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  7. Torsten Persson & Guido Tabellini, . "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Working Papers 189, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  9. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
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  11. Craig Burnside & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Assessing the effects of fiscal shocks," Working Paper Series WP-99-18, Federal Reserve Bank of Chicago.
  12. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  13. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  14. Phillip Arestis & Michelle Baddeley & John S.L. McCombie (ed.), 2007. "Economic Growth," Books, Edward Elgar, number 3958, December.
  15. Buiter, Willem H. & Grafe, Clemens, 2002. "Patching up the Pact: some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union," CEPR Discussion Papers 3496, C.E.P.R. Discussion Papers.
  16. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  17. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, 07.
  18. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
  19. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November.
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