Is Fiscal Policy in the Euro Area Ricardian?

37 Pages Posted: 21 Jul 2017

See all articles by Nikki Panjer

Nikki Panjer

University of Groningen

Leo de Haan

De Nederlandsche Bank

Jan P. A. M. Jacobs

University of Groningen - Faculty of Economics and Business

Date Written: July 17, 2017

Abstract

According to the so-called ‘fiscal theory of the price level’ (FTPL), under a non-Ricardian regime the price level has to adjust to fulfil the government's budget constraint. In contrast, under a Ricardian regime, government balances adjust in order to preserve government solvency. We empirically determine whether a Ricardian or a non-Ricardian regime is more plausible for the euro area, following the research strategy of Canzoneri, Cumby, and Diba (2001). A Vector AutoRegressive (VAR) model for the primary government balance and the government debt is estimated for the period 1980q2-2013q4. Our model uses dummy interaction terms to account for the breaks due to the introduction of the Euro Convergence Criteria (ECC) and the start of the global financial crisis, respectively. No evidence is found in favour of either regime for the pre-ECC period. In the post-ECC period, a Ricardian regime is more plausible. Some evidence points in the direction of a non-Ricardian regime for the period after the start of the financial crisis.

Keywords: Fiscal Policy, Euro area, Ricardian regime

JEL Classification: E63, H62, H63

Suggested Citation

Panjer, Nikki and de Haan, Leo and Jacobs, Jan P.A.M., Is Fiscal Policy in the Euro Area Ricardian? (July 17, 2017). De Nederlandsche Bank Working Paper No. 562. Available at SSRN: https://ssrn.com/abstract=3005224 or http://dx.doi.org/10.2139/ssrn.3005224

Nikki Panjer (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Leo de Haan

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Jan P.A.M. Jacobs

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
14
Abstract Views
182
PlumX Metrics