Fiscal Policy and Monetary Integration in Europe: An Update

Posted: 29 Mar 2010

See all articles by Bertrand Candelon

Bertrand Candelon

University of Maastricht - Department of Economics

Joan Muysken

University of Maastricht

Robert Vermeulen

De Nederlandsche Bank

Date Written: April 2010

Abstract

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.

JEL Classification: E63, H11, H61

Suggested Citation

Candelon, Bertrand and Muysken, Joan and Vermeulen, Robert, Fiscal Policy and Monetary Integration in Europe: An Update (April 2010). Oxford Economic Papers, Vol. 62, Issue 2, pp. 323-349, 2010. Available at SSRN: https://ssrn.com/abstract=1578730 or http://dx.doi.org/gpp017

Bertrand Candelon (Contact Author)

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Joan Muysken

University of Maastricht ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Robert Vermeulen

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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