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Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure

Jasper De Jong and Niels Gilbert

European Journal of Political Economy, 2020, vol. 61, issue C

Abstract: The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, has been criticized from opposite ends. Some blame the EDP for imposing too much fiscal austerity. Others question whether the EDP has any disciplining power at all. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. Overall, we find that a 1% of GDP larger EDP recommendation leads to 0.8–0.9% of GDP of additional fiscal consolidation plans, and 0.6–0.7% of actual consolidation. This result does not extend to countries subject to financial support programs: we find that, while they did implement substantial consolidation measures, in these countries required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped fiscal policies in the euro area, especially in the years 2010–2014, when EDP recommendations were most frequent.

Keywords: EMU; Stability and Growth Pact; Fiscal policy; Real-time data (search for similar items in EconPapers)
JEL-codes: E02 E62 F45 H30 H68 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:61:y:2020:i:c:s0176268018304531

DOI: 10.1016/j.ejpoleco.2019.101822

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European Journal of Political Economy is currently edited by J. De Haan, A. L. Hillman and H. W. Ursprung

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