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Oxford Economic Papers Advance Access published online on June 28, 2009
Oxford Economic Papers, doi:10.1093/oep/gpp017
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© Oxford University Press 2009 All rights reserved

Fiscal policy and monetary integration in Europe: an update

Bertrand Candelon*, Joan Muysken{dagger}, and Robert Vermeulen{ddagger}

*Department of Economics, Maastricht University, The Netherlands
{dagger}Department of Economics, Maastricht University, PO Box 616, 6200 MD Maastricht, The Netherlands; email: j.muysken{at}maastrichtuniversity.nl
{ddagger}CREA, University of Luxembourg, Luxembourg and Department of Economics, Maastricht University, The Netherlands

JEL classifications: E63, H11, H61


  Abstract

By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy has remained procyclical after 1992. This result contradicts the previous findings of Galí and Perotti. It also appears that fiscal rules differ between large and small countries; large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy exhibits different behaviour when facing supply or demand constraints. A procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline.


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