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EUROPEAN FISCAL DISCIPLINE BEFORE AND AFTER EMU: CRASH DIET OR PERMANENT WEIGHT LOSS?

Published online by Cambridge University Press:  01 June 2008

ANDREW HUGHES HALLETT  and
JOHN LEWIS
ANDREW HUGHES HALLETT*
Affiliation:
George Mason University and CEPR
JOHN LEWIS
Affiliation:
De Nederlandsche Bank
*
Address correspondence to: Andrew Hughes Hallett, George Mason University and CEPR, George Mason School of Public Policy, 4400 University Drive, MS 3C6, Fairfax, VA 22030, USA; e-mail: ahughesh@gmu.edu.
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Abstract

This paper studies the evolution of European fiscal policies in three periods: the pre-Maastricht phase (to 1991); the runup to monetary union (1992–1997), and the stability pact phase (1998 onward). Using three separate indicators, we search for structural breaks that could signify a change in the average level of discipline in these periods. We find increased fiscal discipline only up to 1997. We conclude the new fiscal discipline was a temporary phenomenon, a product of the sanction of being denied entry to the Euro. After EMU, fiscal policy gradually loosened. A single structural break test will miss these dynamic effects, and could easily generate the false conclusion that fiscal discipline had tightened since the start of phase two of EMU.

Keywords

Fiscal ConsolidationProbit RegressionsDynamic Structural Breaks
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 3 , June 2008 , pp. 404 - 424
Copyright
Copyright © Cambridge University Press 2008

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