Euro Membership and Fiscal Reaction Functions

SAFE Working Paper Series No. 18

29 Pages Posted: 16 May 2013

See all articles by Alfons J. Weichenrieder

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Jochen Zimmer

Goethe University Frankfurt - Faculty of Economics and Business Administration; Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: May 10, 2013

Abstract

The paper uses fiscal reaction functions for a panel of euro-area countries to investigate whether euro membership has reduced the responsiveness of countries to shocks in the level of inherited debt compared to the period prior to succession to the euro. While we find some evidence for such a loss in prudence, the results are not robust to changes in the specification, such as an exclusion of Greece from the panel. This suggests that the current debt problems may result to a large extent from preexisting debt levels prior to entry or from a larger need for fiscal prudence in a common currency, while an adverse change in the fiscal reaction functions for most countries does not apply.

Keywords: debt sustainability, fiscal reaction function, euro area

JEL Classification: H62, E62

Suggested Citation

Weichenrieder, Alfons J. and Zimmer, Jochen, Euro Membership and Fiscal Reaction Functions (May 10, 2013). SAFE Working Paper Series No. 18. Available at SSRN: https://ssrn.com/abstract=2265312 or http://dx.doi.org/10.2139/ssrn.2265312

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Jochen Zimmer

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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