Fiscal Policy in the Transition to Monetary Union: A Structural VAR Model

Bruneau, Catherine; de Bandt, Olivier

doi:10.2139/ssrn.1734355

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Fiscal Policy in the Transition to Monetary Union: A Structural VAR Model

Banque de France Working Paper No. 60

41 Pages Posted: 4 Jan 2011

See all articles by Catherine Bruneau

Catherine Bruneau

Université Paris X Nanterre; Université Paris I Panthéon-Sorbonne

Olivier de Bandt

Banque de France - Economic Study and Research Division

Date Written: January 1, 1999

Abstract

In order to assess the effect of fiscal rules in Stage Three of EMU for France and Germany, Bayoumi and Eichengreen's (1992) structural VAR analysis is extended by including the general government financial surplus and conditioning by external variables. This allows a distinction between fiscal and monetary shocks. During the period 1972.1-1995.4, monetary policy has a significant effect on prices in both countries. On the other hand, fiscal shocks, whose effect on the deficit provides a measure of the " structural deficit ", only contribute to a significant part of the dynamics of output in Germany. For that period, they appear to have little effect in France. In addition, fiscal shocks are uncorrelated between the two countries, although it is difficult to conclude that it reflects purely idiosyncratic shocks rather than a different policy-mix.

Keywords: Budget Deficit, Ricardian Equivalence, Structural VAR, EMU

Suggested Citation: Suggested Citation

Bruneau, Catherine and de Bandt, Olivier, Fiscal Policy in the Transition to Monetary Union: A Structural VAR Model (January 1, 1999). Banque de France Working Paper No. 60, Available at SSRN: https://ssrn.com/abstract=1734355 or http://dx.doi.org/10.2139/ssrn.1734355