The stability and growth pact, fiscal policy institutions and stabilization in Europe

Abstract

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.

The impact of supranational fiscal rules on public finance: the case of EMU member states

“…As described above, acyclicality in the SGP period was also reported by other studies (Marinheiro, 2007;Poplawski Ribeiro, 2009;Bénétrix and Lane, 2012). A decrease in the CAPB reaction to the debt was also observed (the coefficient is significant only with the IV-FE method), which points to a decrease in the debt stabilisation motive given the previous period.…”

“…Conversely, Candelon et al (2008) and Fatás and Mihov (2009) established that discretionary policy in the period before and after the introduction of the EU fiscal rules was procyclical. On the other hand, studies by von Hagen and Wyplosz (2008), Marinheiro (2007), Poplawski Ribeiro (2009) and Bénétrix and Lane (2012) found that, in the Maastricht period, the discretionary fiscal policy had become countercyclical. After the entry to the EMU, Annett (2006), Marinheiro (2007) and Bénétrix and Lane (2012) observed a recurring procyclicality.…”

“…On the other hand, studies by von Hagen and Wyplosz (2008), Marinheiro (2007), Poplawski Ribeiro (2009) and Bénétrix and Lane (2012) found that, in the Maastricht period, the discretionary fiscal policy had become countercyclical. After the entry to the EMU, Annett (2006), Marinheiro (2007) and Bénétrix and Lane (2012) observed a recurring procyclicality. It should be noted that the studies mostly identify the procyclical behaviour of public expenditure, whereas revenues behave countercyclically or acyclically (Turrini 2008;Fatás and Mihov, 2009).…”

Over-optimistic official forecasts and fiscal rules in the eurozone

“…Marinheiro (2010) adds another complete business cycle to the data under the SGP, and again finds that the forecasts of European fiscal authorities are systematically too optimistic. This evidence is not consistently strong across the set of 15 EU countries, but the bias is high for France, Italy and Portugal at all forecast horizons.…”

From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU

“…These decisions comprise both the fiscal plan and its implementation. See, for example, Forni and Momigliano (2004), Cimadomo (2007), Marinheiro (2008, , Lewis (2009) andPina (2009). An early contribution is Strauch et al (2004), who use data on budget balances from the stability and convergence programmes over the period 1991-2002 and find that governments on average predict the future budget outcome fairly well.…”