Fiscal Policy: A Useful Tool After All?

  • Jérôme CreelEmail author
  • Francesco Saraceno


This chapter argues that the decision to constrain fiscal policy in the EMU is not intrinsically linked to the implementation of the single currency, but it is the result of the dominant New Keynesian macroeconomic framework at the time of the Maastricht Treaty. The New Keynesian theory emphasizes the role of market adjustments in absorbing macroeconomic shocks; the return to the natural of the economy happens spontaneously, and monetary policy can at best, through inflation targeting and the anchoring of expectations, speed the process. The New Keynesian model has no real role in fiscal policy. The chapter then argues that both the original Stability and Growth Pact, and the subsequent fiscal rules (including the recent Fiscal Compact) fare rather poorly in terms of the classic criteria for the optimality of fiscal rules put forward by Kopits and Symanski in 1998. We link the poor performance of the Eurozone economy including during the recent crisis to the existence of these rules, and we conclude with some remarks on how the current reform debate should take stock of recent theoretical and empirical developments most notably on the size of multipliers.


Stability and growth pact Optimal rules Fiscal policy Fiscal multipliers EMU crisis 


  1. Baldwin, Richard, Thorsten Beck, Agnès Bénassy-Quéré, Olivier J. Blanchard, Giancarlo Corsetti, Paul De Grauwe, Wouter Den Haan, et al. 2015. Rebooting the Eurozone: Step 1 – Agreeing a Crisis Narrative Introduction and Summary. CEPR Policy Insight 85, November.Google Scholar
  2. Barro, Robert J., and David B. Gordon. 1983. A Positive Theory of Monetary Policy in a Natural Rate Model. Journal of Political Economy 91 (4): 589–610. Scholar
  3. Berg, Tim Oliver. 2015. Time Varying Fiscal Multipliers in Germany. Review of Economics 66 (1). Lucius & Lucius: 13–46.
  4. Blanchard, Olivier, and Roberto Perotti. 2002. An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics 117 (4): 1329–1368.Google Scholar
  5. Blanchard, Olivier J., and Daniel Leigh. 2013. Growth Forecast Errors and Fiscal Multipliers. American Economic Review 103: 117–120. Scholar
  6. Buti, Marco, Sylvester Eijffinger, and Daniele Franco. 2003. Revisiting EMU’s Stability Pact: A Pragmatic Way Forward. Oxford Review of Economic Policy 19 (1): 100–111.CrossRefGoogle Scholar
  7. Creel, Jérôme, and Francesco Saraceno. 2010a. European Fiscal Rules After the Crisis. Journal of Innovation Economics 6 (2): 95–112. Scholar
  8. ———. 2010b. The Crisis, Automatic Stabilisation, and the Stability Pact. Revista de Economia Y Estadistica XLVIII (1): 75–104.Google Scholar
  9. Creel, Jérôme, Paola Monperrus-Veroni, and Francesco Saraceno. 2009. On the Long-Term Effects of Fiscal Policy in the United Kingdom: The Case for a Golden Rule. Scottish Journal of Political Economy 56 (5): 580–607. Scholar
  10. Creel, Jérôme, Eric Heyer, and Mathieu Plane. 2011. Petit Précis de Politique Budgétaire Par Tous Les Temps: Les Multiplicateurs Budgétaires Au Cours Du Cycle. Revue de l’OFCE 116: 61–88.Google Scholar
  11. Eichengreen, Barry, and Kevin O’Rourke. 2009. A Tale of Two Depressions. VoxEU. Last Update: 2010.Google Scholar
  12. Fitoussi, Jean-Paul, and Francesco Saraceno. 2008. Fiscal Discipline as a Social Norm: The European Stability Pact. Journal of Public Economic Theory 10 (6). Blackwell Publishing Inc.: 1143–1168.
  13. ———. 2011. Inequality, the Crisis and After. Rivista Di Politica Economica 1: 9–28.Google Scholar
  14. Gechert, Sebastian, and Henner Will. 2012. Fiscal Multipliers: A Meta Regression Analysis, vol. 97. IMK Working Paper.
  15. Glocker, Christian, Giulia Sestieri, and Pascal Towbin. 2017. Time-Varying Fiscal Spending Multipliers in the UK. Banque de France Working Paper 643, September.Google Scholar
  16. Jordà, Òscar, and Alan M. Taylor. 2016. The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy. Economic Journal 126 (590): 219–255. Scholar
  17. Kopits, George, and Steven A. Symansky. 1998. Fiscal Policy Rules. IMF Occasional Papers, No. 162.Google Scholar
  18. Ramey, Valerie A., and Sarah Zubairy. 2018. Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data. Journal of Political Economy 126 (2): 850–901. Scholar
  19. Revoltella, Debora. 2014. The European Investment Crisis. Intereconomics 49 (4): 182–183. Scholar
  20. Saraceno, Francesco. 2018. La Scienza Inutile. Tutto Quello Che Non Abbiamo Voluto Imparare Dall’economia. Roma: Luiss University Press.Google Scholar
  21. Truger, Achim. 2016. The Golden Rule of Public Investment – A Necessary and Sufficient Reform of the EU Fiscal Framework? IMK Working Papers 168–2016. IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  1. 1.OFCE, Sciences PoParisFrance
  2. 2.ESCP EuropeParisFrance
  3. 3.LUISSRomeItaly

Personalised recommendations