The Euro and Fiscal Policy

55 Pages Posted: 17 Feb 2009 Last revised: 4 Aug 2010

See all articles by Antonio Fatás

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Ilian Mihov

INSEAD; Centre for Economic Policy Research (CEPR)

Date Written: February 2009

Abstract

The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.

Suggested Citation

Fatas, Antonio and Mihov, Ilian, The Euro and Fiscal Policy (February 2009). NBER Working Paper No. w14722. Available at SSRN: https://ssrn.com/abstract=1344702

Antonio Fatas (Contact Author)

INSEAD ( email )

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HOME PAGE: http://faculty.insead.edu/fatas

Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Ilian Mihov

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, Singapore 138680
Singapore
+65 6799 5434 (Phone)

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/personal/imihov/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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