Fiscal Discipline before and after EMU - Permanent Weight Loss or Crash Diet?
This paper studies the evolution of European fiscal policies and the attempts at budgetary consolidation through three periods: the pre-Maastricht phase (to 1991); the run up to monetary union (1992-97), and finally the stability pact phase (1998 onwards). Using three separate indicators Ð the probability of undertaking a consolidation, the degree to which it is sustained, and the probability of exceeding a specified deficit limit Ð we search for structural breaks which could signify a change in the average level of fiscal discipline in these periods. We find increased discipline only up to 1997. Thereafter discipline erodes to the extent that, by 2005, there is less discipline than before the Maastricht process started. We conclude the new fiscal discipline was temporary; a product of the sanction of being denied entry to the Euro, and that EMU itself has had no impact on discipline (in the absence of that sanction). Our methodological innovation is to show the importance of the dynamics of fiscal behaviour: step dummies for changes in the average level of discipline, and trend dummies to capture any decline/increase relative to that average. A single structural break test will miss these dynamic effects, and may generate the erroneous conclusion that fiscal discipline had tightened since the start of phase two of EMU.
|Date of creation:||May 2005|
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- von Hagen, Jurgen & Hughes Hallett, Andrew & Strauch, Rolf, 2002. "Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 512-535, December.
- Alessandro Turrini, 2004. "Public investment and the EU fiscal framework," European Economy - Economic Papers 2008 - 2015 202, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
- Galí, Jordi & Perotti, Roberto, 2003.
"Fiscal Policy and Monetary Integration in Europe,"
CEPR Discussion Papers
3933, C.E.P.R. Discussion Papers.
- Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
- In, Younghwan & Serrano, Roberto, 2004. "Agenda restrictions in multi-issue bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 53(3), pages 385-399, March.
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