The Euro and Fiscal Policy

Antonio Fatas and Ilian Mihov

No 14722, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper provides and empirical characterization of fiscal policy in the euro area and in a group of twenty-two OECD economies over the period from 1970 until 2007. Using the cyclically-adjusted fiscal balance we document that policy in the euro area has been mildly pro-cyclical. The adoption of the common currency and the constraints imposed by the Stability and Growth Pact have not had a large impact on the cyclical behavior of the structural balance. In contrast, over the past ten years US fiscal policy has become highly countercyclical, which was due predominantly to discretionary changes in tax policies. However, the component of the budget due to automatic stabilizers reacts stronger in the euro-area countries than in the US. We also document the primary balance in the OECD economies is more sensitive to output growth rather than to the output gap, which calls into question the common practice of adjusting structural balances by using elasticities with respect to the output gap.

JEL-codes: E62 E65 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cba and nep-mac
Note: ME PE
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Citations: View citations in EconPapers (53)

Published as The Euro and Fiscal Policy , Antonio Fatás, Ilian Mihov. in Europe and the Euro , Alesina and Giavazzi. 2010

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