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Fiscal policy rules in practice

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  • Thams, Andreas

Abstract

This paper analyzes German and Spanish fiscal policy using simple policy rules. We choose Germany and Spain, as both are Member States in the European Monetary Union (EMU) and underwent considerable increases in public debt in the early 1990s.We focus on the question, how fiscal policy behaves under rising public debt ratios. It is found that both Germany and Spain generally exhibit a positive relationship between government revenues and debt. Using Markov-switching techniques, we show that both countries underwent a change in policy behavior in the light of rising debt/output ratios at the end of the 1990s. Interestingly, this change in policy behavior differs in its characteristics across the two countries and seems to be non-permanent in the case of Germany.

Suggested Citation

  • Thams, Andreas, 2007. "Fiscal policy rules in practice," SFB 649 Discussion Papers 2007-016, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2007-016
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    2. Byrne, Joseph P. & Fiess, Norbert & MacDonald, Ronald, 2011. "The global dimension to fiscal sustainability," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 137-150, June.
    3. Mário Jorge Cardoso de Mendonça & Cláudio Hamilton Matos dos Santos, 2008. "Revisitando a Função de Reação Fiscal no Brasil Pós-Real: Uma Abordagem de Mudanças de Regime," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807171729460, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. António AFONSO & Priscilla TOFFANO, 2013. "Fiscal regimes in the EU," Working Papers of Department of Economics, Leuven ces13.06, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    5. Christian Glocker, 2013. "Government Expenditures and Business Cycles—Policy Reaction and Surprise Shocks," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 7(3), pages 215-254, August.
    6. Ricci-Risquete, Alejandro & Ramajo, Julián & de Castro, Francisco, 2016. "Do Spanish fiscal regimes follow the euro-area trends? Evidence from Markov-Switching fiscal rules," Economic Modelling, Elsevier, vol. 59(C), pages 484-494.
    7. Leith, Campbell & Wren-Lewis, Simon, 2008. "Interactions between monetary and fiscal policy under flexible exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2854-2882, September.
    8. Mendonça, Mario Jorge & Moreira, Tito Belchior S. & Sachsida, Adolfo, 2021. "Fiscal and monetary policy rules in Brazil: empirical evidence of monetary and fiscal dominance," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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