Pushing the limit? Fiscal policy in the European Monetary Union

Betty Daniel () and Christos Shiamptanis

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 11, 2307-2321

Abstract: Governments are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to GDP. These fiscal limits invalidate Bohn's criterion for fiscal sustainability, which allows explosive debt relative to GDP, eventually violating any fiscal limit. We derive restrictions on a fiscal rule, necessary for the government to eliminate explosive behavior. These restrictions require that the response of the primary surplus to debt be relatively strong, and that the primary surplus be cointegrated with both debt and output. We test these empirical implications for a panel of eleven EMU countries, and find that they are satisfied, implying that fiscal policy does not create explosive behavior.

Keywords: European Monetary Union; Fiscal policy; Fiscal limits; Panel cointegration; Error correction (search for similar items in EconPapers)
JEL-codes: C32 C33 E42 E62 F33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:11:p:2307-2321

DOI: 10.1016/j.jedc.2013.06.003

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