Summary We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for 12 Euro area member states over the 1970‐2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996‐2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government current expenditure and direct taxes. In contrast, in the core member states, which did not benefit from yields’ convergence related to the Euro area establishment, responsiveness of fiscal stance to inherited sovereign debt increased during 1996‐2007. This was achieved mainly through pronounced adjustments in government current expenditure. The findings are robust to various changes in modelling approach.

The Italian Association for the Study of Economic Asymmetries (a/simmetrie) was established in 2013 as an independent, nonprofit think-tank based in Rome (Italy). a/simmetrie undertakes applied research and policy analysis on economic asymmetries, both in their economic nature, and in their political and juridical implications; provides a forum for the advocacy of policies leading to a more equitable and sustainable growth; and promotes the public debate in the field of economic policy-making, by involving researchers, politicians, and other relevant stakeholders. The a/simmetrie working paper series publishes outputs from a/simmetrie research in progress, as well as papers presented at a/simmetrie conferences and seminars, and contributions from visiting fellows. Comments are welcome. Unless otherwise indicated, the views expressed in this publication are those of the author(s). Publication does not imply endorsement by a/simmetrie.

No abstract