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With the advent of the third and final phase of European and Monetary Union (EMU), the debate over European monetary unification is at the top of the political and economic agenda. Much has been written over the past five years about whether EMU is justified given the various expected benefitsand prospective costs, but there has been little detailed material on how EMU will work and what the practical implications of it will be for Europe as a whole. Economic Policy in EMU is a comprehensive look at the mechanisms involved, likely effects on monetary and budgetary policy, and the ways in which monetary union will deal with and affect business cycles and regional differences. It combines rigorous analysis of how the European economy works withan insider view of how this will change after 1999: as such, it is vital reading for all involved in the most important topic facing Europe today.
This paper reviews the theoretical and empirical literature on the effectiveness of fiscal policy. The focus is on the size of fiscal multipliers, and on the possibility that multipliers can turn negative (i.e., that fiscal contractions can be expansionary). The paper concludes that fiscal multipliers are overwhelmingly positive but small. However, there is some evidence of negative fiscal multipliers.
The effects of fiscal policy measures, both taxes and public spending, adopted by developing countries in response to the 2009 global crisis are still uncertain. This book discusses them using an analytical framework that allows for distilling possible implications on growth and social welfare.
This paper explores how fiscal policy can affect medium- to long-term growth. It identifies the main channels through which fiscal policy can influence growth and distills practical lessons for policymakers. The particular mix of policy measures, however, will depend on country-specific conditions, capacities, and preferences. The paper draws on the Fund’s extensive technical assistance on fiscal reforms as well as several analytical studies, including a novel approach for country studies, a statistical analysis of growth accelerations following fiscal reforms, and simulations of an endogenous growth model.
Recently, monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence. Simultaneously, in the fiscal area, market development has allowed public debt managers to focus more on cost minimization. This “divorce” of monetary and debt management functions in no way lessens the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. This paper analyzes these issues based on a review of the relevant literature and of country experiences from an institutional and operational perspective.
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
We draw on a newly collected historical dataset of fiscal variables for a large panel of countries—to our knowledge, the most comprehensive database currently available—to gauge the degree of fiscal prudence or profligacy for each country over the past several decades. Specifically, our dataset consists of fiscal revenues, primary expenditures, the interest bill (and thus both the primary and the overall fiscal deficit), the government debt, and gross domestic product, for 55 countries for up to two hundred years. For the first time, a large cross country historical data set covers both fiscal stocks and flows. Using Bohn’s (1998) approach and other tests for fiscal sustainability, we document how the degree of prudence or profligacy varies significantly over time within individual countries. We find that such variation is driven in part by unexpected changes in potential economic growth and sovereign borrowing costs.
This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.
We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.