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Ricardian fiscal regimes in the European Union

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Abstract

The prevalence of different fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, notably for European Union countries. The purpose of this article is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Furthermore, electoral budget cycles also seem to play a relevant role in fiscal behaviour.

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Notes

  1. Following Sargent and Wallace (1981), a Ricardian regime is a “regime of monetary predominance” if money demand and supply determine the price level. In a non-Ricardian regime, “a regime of fiscal predominance,” prices would be endogenously determined by the government budget constraint.

  2. The proponents of the fiscal theory of the price level argue along these lines, see Woodford (1994), Sims (1994), Cochrane (1999), and Gordon and Leeper (2006) while Buiter (2002) offers a critical view.

  3. Afonso (2005a) reports results regarding the lack of fiscal sustainability for the European Union.

  4. For additional related evidence see Bohn (1998), Cochrane (1999), von Hagen et al. (2001), Galí and Perotti (2003), EC (2004), Ballabriga and Martinez-Mongay (2005), and Bohn (2005).

  5. See, for instance, Bond (2002) and Verbeek (2003).

  6. Levin et al. (2002) mention that this type of test is particularly useful for panels of moderate size, between 10 and 250 cross sections and 25–250 time series observations per cross section, which fits our data sample.

  7. Phillips and Moon (2000) and Arellano and Honoré (2001) provide further discussions on panel unit root tests.

  8. However, measurement issues and stock-flow adjustments might blur such expected relationships as reported, for instance, by von Hagen and Wolff (2004).

  9. The sample breakdown for the Maastricht period might have different meanings for each country. Indeed, the dates of referendum approval varied among countries: 1992 for Belgium, France, Italy, Luxemburg, Netherlands, Ireland, Greece, Spain and Portugal; 1993 for Denmark, United Kingdom and Germany; 1994 for Austria, Finland and Sweden.

  10. Rogoff and Sibert (1988), Alesina and Roubini (1992), and Alesina et al. (1997) provide subsequent related work.

  11. The electoral dummy assumes a value of one when there is a parliamentary election (see Afonso 2005b for the data). The data on election dates were obtained from the following sources: http://www.idea.int/vt/total_number_of_elections.cfm and http://www.electionresources.org/

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Acknowledgements

I am grateful to Peter Claeys, Vítor Gaspar, José Marín, Ludger Schuknecht, Jean-Pierre Vidal, Jürgen von Hagen, participants at ECB, and at ISEG/UTL seminars, at the Money Macro and Finance Research Group Meeting, at the LACEA conference, and to an anonymous referee for helpful comments. UECE is supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal), financed by ERDF and Portuguese funds.

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Authors and Affiliations

  1. European Central Bank, Directorate General Economics, Kaiserstraße 29, 60311, Frankfurt am Main, Germany

    António Afonso

  2. Department of Economics, ISEG/TULisbon—Technical University of Lisbon, Lisbon, Portugal

    António Afonso

  3. UECE—Research Unit on Complexity and Economics, R. Miguel Lupi 20, 1249-078, Lisbon, Portugal

    António Afonso

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Afonso, A. Ricardian fiscal regimes in the European Union. Empirica 35, 313–334 (2008). https://doi.org/10.1007/s10663-008-9066-3

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