The stability and growth pact, fiscal policy institutions and stabilization in Europe
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Ever since its inception, the EMU has been subject to controversy. The fiscal policy rules embedded in the Maastricht Treaty, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP has constantly been accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries since the Maastricht Treaty. This paper argues that this conclusion stands up to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data, there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to less use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999–2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in forecasting the output gap, and not the result of a change in the intentions of policy-makers. As a result, there is no evidence to support the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policies.
KeywordsFiscal policy Stabilization Stability and growth pact Institutional arrangements Real-time data
JEL ClassificationE62 H62
The text has benefited from comments received from an anonymous referee and from António Afonso, Martin Larch, Peter Brandner, José Tavares, Alfred Sitz and other participants at the 63rd International Atlantic Economic Conference held in Madrid on 14–18 March 2007, and at the Workshop on the Sustainability of the Public Debt held at Klagenfurt University on 20 May 2007. All remaining errors or omissions are solely my responsibility. A word of recognition is also due to Jochen Mierau, Richard Jong-A-Pin and Jakob de Haan for making their data set on political variables available, and to Reinhard Neck for superbly organizing the two mentioned sessions. The author also acknowledges financial support provided by the Portuguese Foundation for Science and Technology (FCT) under research grant POCI/EGE/60069/2004 (partially funded by FEDER, programme POCI 2010).
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