The Stability and Growth Pact, Fiscal Policy Institutions, and Stabilization in Europe

Carlos Marinheiro ()

No 2007-07, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP as always being accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries after the Maastricht Treaty. This paper concludes that this conclusion resists to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to a decrease in the use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999-2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in the forecast of the output gap, and not the result of a change in the intentions of policy makers. As a result, there is no evidence in favour of the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policy.

Keywords: Fiscal policy; stabilization; Stability and Growth Pact; institutional arrangements; realtime data (search for similar items in EconPapers)
JEL-codes: E62 H62 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in International Economics and Economic Policy 5(1-2):189-207, 2008

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Related works:
Journal Article: The stability and growth pact, fiscal policy institutions and stabilization in Europe (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:gmf:wpaper:2007-07

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