Fiscal Policy: A Useful Tool After All?
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.
KeywordsStability and growth pact Optimal rules Fiscal policy Fiscal multipliers EMU crisis
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