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Overheating in Small Euro Area Economies: Should Fiscal Policy React?

Author

Listed:
  • Peter Hoeller
  • Claude Giorno
  • Christine de la Maisonneuve

Abstract

This paper reviews first the fiscal policy recommendations by the EU, the IMF and the OECD for Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal and Spain. All these countries had inflation above the euro area average in early 2001, some by a considerable margin. The fiscal policy prescriptions deviate little, the EU, the IMF and the OECD generally recommending an active use of fiscal policy. There are some exceptions, however. The next section examines indicators of excess demand in these countries. This is followed by a review of the factors that help or hinder market-based adjustment, including simulations to gauge their effect. Market-based adjustment to demand shocks depends critically on whether the effect of a lower real interest rate is strong relative to the loss in competitiveness, on the size of wealth effects, on wage and price setting behavior, on the supply response and on the strength of trade integration. Simulations suggest that market-based ... Surchauffe dans les petites économies de la zone euro : La politique budgétaire devrait-elle réagir ? Cet article passe d’abord en revue les recommandations de politique budgétaire de l’UE, du FMI et de l’OCDE concernant la Finlande, la Grèce, l’Irlande, le Luxembourg, les Pays-Bas, le Portugal et l’Espagne. Tous ces pays avaient une inflation supérieure à la moyenne de la zone euro au début de 2001, dans certains cas de façon très marquée. Dans ce contexte, les prescriptions de politique économique de l’UE, du FMI et de l’OCDE à ces pays ne diffèrent guère et recommandent en général une utilisation active de l’instrument budgétaire. Des exceptions existent cependant. La deuxième partie de cet article examine les indicateurs d’excès de demande dans ces pays. Elle est suivie d’une revue des facteurs qui favorisent ou empêchent un ajustement de l’économie grâce aux mécanismes de marché à partir notamment de simulations évaluant l’importance de leurs effets. En cas de choc de demande, l’ajustement induit par les forces de marchés dépend de façon cruciale de l’importance relative de ...

Suggested Citation

  • Peter Hoeller & Claude Giorno & Christine de la Maisonneuve, 2002. "Overheating in Small Euro Area Economies: Should Fiscal Policy React?," OECD Economics Department Working Papers 323, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:323-en
    DOI: 10.1787/221680343230
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    File URL: https://doi.org/10.1787/221680343230
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    Citations

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    Cited by:

    1. Carlos Vieira & Isabel Vieira & Sofia Costa, 2003. "Monetary and Fiscal Policies in EMU: some relevant issues," Eastward Enlargement of the Euro-zone Working Papers wp17f, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Mar 2003.
    2. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," NBP Working Papers 54, Narodowy Bank Polski, Economic Research Department.
    3. Servaas Deroose & Sven Langedijk & Werner Roeger, 2004. "Reviewing adjustment dynamics in EMU: from overheating to overcooling," European Economy - Economic Papers 2008 - 2015 198, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Marco Buti & Carlos Martinez-Mongay & Khalid Sekkat & Paul van den Noord, 2003. "Automatic Fiscal Stabilisers in EMU: A Conflict between Efficiency and Stabilisation?," CESifo Economic Studies, CESifo, vol. 49(1), pages 123-140.

    More about this item

    Keywords

    European Union; fiscal policy; politique fiscale; Union européenne;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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