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Has the Stability and Growth Pact Made Fiscal Policy More Pro-Cyclical?

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  • Jacopo Cimadomo

Abstract

The Stability and Growth Pact has recently been under close examination on the grounds that, rather than being associated with a neutral fiscal policy stance over the business cycle, it may have induced pro-cyclicality during downturns while also being unable to curb loose policies under buoyant economic conditions. However, the existing empirical literature does not find strong support to these arguments. By focusing on the euro area and on those phases of the economic cycle in which swings are particularly strong, it is found here that fiscal policy seems to have been neutral both in mild and severe recessions. In contrast, during upturns and from 1999 onwards, i.e. since the introduction of the Pact, a pro-cyclical bias is at play when economic conditions are particularly favourable. Nevertheless, this occurs also in other industrialised countries. Hence, the surge of pro-cyclicality cannot be associated directly with the adoption of the EU fiscal framework.

Suggested Citation

  • Jacopo Cimadomo, 2005. "Has the Stability and Growth Pact Made Fiscal Policy More Pro-Cyclical?," La Lettre du CEPII, CEPII research center, issue 247.
    • Handle: RePEc:cii:cepill:2005-247
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    Citations

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    Cited by:

    1. Jacopo Cimadomo, 2016. "Real-Time Data And Fiscal Policy Analysis: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 30(2), pages 302-326, April.
    2. International Monetary Fund, 2014. "Euro Area Policies: Selected Issues," IMF Staff Country Reports 2014/199, International Monetary Fund.
    3. Jernej Mencinger Aleksander Aristovnik, 2014. "Fiscal Policy Stance Reaction to the Financial/Economic Crisis in the EMU: The Case of Slovenia," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 17(Special C), pages 17-30, December.
    4. Mencinger, Jernej & Aristovnik, Aleksander, 2013. "Fiscal Policy Stance in the European Union: The Impact of the Euro," MPRA Paper 44708, University Library of Munich, Germany.
    5. Masten, Igor & Grdović Gnip, Ana, 2016. "Stress testing the EU fiscal framework," Journal of Financial Stability, Elsevier, vol. 26(C), pages 276-293.
    6. Hughes Hallett, Andrew & Bernoth, Kerstin & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
    7. Bernoth, Kerstin & Hughes Hallett, Andrew & Lewis, John, 2008. "Did Fiscal Policy Makers Know What They Were Doing? Reassessing Fiscal Policy with Real Time Data," CEPR Discussion Papers 6758, C.E.P.R. Discussion Papers.
    8. Mr. Luc Eyraud & Mr. Tao Wu, 2015. "Playing by the Rules: Reforming Fiscal Governance in Europe," IMF Working Papers 2015/067, International Monetary Fund.
    9. Ioannou, Demosthenes & Stracca, Livio, 2014. "Have the euro area and EU governance worked? Just the facts," European Journal of Political Economy, Elsevier, vol. 34(C), pages 1-17.

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    Keywords

    Fiscal policy;

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