Journal Article

Fiscal policy and monetary integration in Europe: an update

Bertrand Candelon, Joan Muysken and Robert Vermeulen

in Oxford Economic Papers

Volume 62, issue 2, pages 323-349
Published in print April 2010 | ISSN: 0030-7653
Published online June 2009 | e-ISSN: 1464-3812 | DOI: https://dx.doi.org/10.1093/oep/gpp017
Fiscal policy and monetary integration in Europe: an update

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  • National Budget, Deficit, and Debt
  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Public Economics

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By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy has remained procyclical after 1992. This result contradicts the previous findings of Galí and Perotti. It also appears that fiscal rules differ between large and small countries; large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy exhibits different behaviour when facing supply or demand constraints. A procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline.

Keywords: E63; H11; H61

Journal Article.  10169 words.  Illustrated.

Subjects: National Budget, Deficit, and Debt ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Public Economics

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