Estimating the Benefits of a Common European Fiscal Policy

Nannette Hechler-Fayd'Herbe

Swiss Journal of Economics and Statistics (SJES), 1997, vol. 133, issue III, 575-596

Abstract: The prospect of the European monetary union moving ahead on schedule has recently revived the discussion on stabilisation policies. The starting point of this discussion has been the observation that, because of relatively low labour mobility and the presence of country-specific shocks, monetary policy at the EC-level might not have the capacity to satisfy national stabilisation objectives. If it leaves economies more exposed to aggregate shocks, the loss of national monetary stabilisation instruments may prove costly and require the Community to insure against regional shocks by use of the other instrument at her disposal: fiscal policy. This paper addresses two main issues. First, it investigates the extent to which macroeconomic stabilisation is desirable from the point of view of the consumer in the European Community, by estimating the perceived costs of consumption instability. Second, being aware that consumption shocks can probably not be entirely eliminated and the individual countries' consumption risk could at best be diversified through an EC-level insurance mechanism, we focus explicitly on the benefits of such a stabilisation policy. Our estimations are based on three alternative models for consumption: a trend stationary, a random walk and an autoregressive model. The results show that traditional stabilisation policies associated with temporary shocks may not generate significant benefits.

Date: 1997
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