Fiscal Policy in the Transition to Monetary Union: a Structural VAR Model

C. Bruneau and Olivier de Bandt

Working papers from Banque de France

Abstract: In order to assess the effect of fiscal rules in Stage Three of EMU for France and Germany, Bayoumi and Eichengreen's (1992) structural VAR analysis is extended by including the general government financial surplus and conditioning by external variables. This allows a distinction between fiscal and monetary shocks. During the period 1972.1-1995.4, monetary policy has a significant effect on prices in both countries. On the other hand, fiscal shocks, whose effect on the deficit provides a measure of the " structural deficit ", only contribute to a significant part of the dynamics of output in Germany. For that period, they appear to have little effect in France. In addition, fiscal shocks are uncorrelated between the two countries, although it is difficult to conclude that it reflects purely idiosyncratic shocks rather than a different policy-mix.

Keywords: Budget deficit; Ricardian equivalence; Structural VAR; EMU (search for similar items in EconPapers)
JEL-codes: C50 E42 H2 (search for similar items in EconPapers)
Pages: 35 pages
Date: 1999
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Citations: View citations in EconPapers (10)

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