EMU and the Cyclical Behavior of Fiscal Policy: A Suggested Interpretation

Oliver Landmann (oliver.landmann@vwl.uni-freiburg.de)
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Oliver Landmann: Institute for Economic Research, University of Freiburg

No 29, Discussion Paper Series from Department of International Economic Policy, University of Freiburg

Abstract: Fiscal policy is widely criticized for its failure to act as a stabilizing countercyclical force in the European Monetary Union. Two periods should be distinguished: Prior to the Financial Crisis of 2008, when monetary policy had traction to pursue stability for the aggregate eurozone, fiscal policies failed to contain macroeconomic divergence across the currency area. After the crisis, when interest rates had hit the zero lower bound, widespread fiscal austerity ex?acerbated the persistent recession. The paper proposes a minimal model of decentralized fiscal policymaking in a monetary union. The model is used to interpret policy behavior in both periods. The analysis points to a pro?cyclical bias and suggests a need for coordination.

Keywords: Fiscal Policy; Monetary Union; Multiplier; International Policy Coordination; Monetary?Fiscal Policy Interaction (search for similar items in EconPapers)
JEL-codes: E5 E6 F41 F42 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2014-08, Revised 2014-08
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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