Keynesian, Non-Keynesian or No Effects of Fiscal Policy Changes? The Emu Case

Abstract

This paper studies the experiences with fiscal adjustments in the European Union (EU) countries during the transition period to the Economic and Monetary Union (EMU). Using several approaches suggested in the literature on fiscal adjustments and their macroeconomic effects and in the literature on EMU, we analyze the effects of the fiscal adjustments during this period on private consumption. Thereby, we also take the specific context of the transition towards EMU explicitly into consideration. At best mixed evidence for the presence of non-linearities in the relation between fiscal adjustments and private spending is obtained. There is no clear-cut evidence for the hypothesis of "expansionary fiscal contractions" which may have alleviated the burden from fiscal consolidation in the EMU case. The sensitivity of the results for a number of factors is also checked.

Keywords: Fiscal Retrenchment, EMU

JEL Classification: E32, F43