The Economic Importance of Fiscal Rules

37 Pages Posted: 2 Aug 2006

See all articles by Michael J. Artis

Michael J. Artis

University of Manchester - Institute for Political & Economic Governance (IPEG)

Luca Onorante

European Central Bank (ECB); European University Institute

Date Written: May 2006

Abstract

The paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each Eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the SGP in its old and reformed versions. The results suggest that fiscal policy has had in the past a limited smoothing effect on the cycle and therefore the cost of the old rules in the "corrective" arm of the Pact was also limited. As for the reform of the Pact the analysis is overall supportive of the new country-specific Medium term Objectives. The modified rules of the excessive deficit procedure are likely to give governments only a limited extra leeway to reduce the variability of the cycle.

Keywords: European Monetary Union, Stability and Growth Pact, fiscal-monetary interactions

JEL Classification: E61, E62, E63

Suggested Citation

Artis, Michael J. and Onorante, Luca, The Economic Importance of Fiscal Rules (May 2006). CEPR Discussion Paper No. 5684, Available at SSRN: https://ssrn.com/abstract=921836

Michael J. Artis (Contact Author)

University of Manchester - Institute for Political & Economic Governance (IPEG) ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Luca Onorante

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

European University Institute

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

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