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Fiscal Policy Rules for Stabilisation and Growth: A Simulation Analysis of Deficit and Expenditure Targets in a Monetary Union

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  • Tilman Brück
  • Rudolf Zwiener

Abstract

We analyse the effectiveness of fiscal policy rules for business cycle stabilisation in a monetary union using a quarterly macro-econometric model of Germany. The simulations compare a deficit target and an expenditure target under a range of supply, demand and fiscal shocks. Their effects are evaluated by their impact on prices and output. The analysis demonstrates that in general the deficit target of the stability pact leads to less stabilisation than an expenditure target. The results suggest that the deficit rule of the stability pact should be replaced with an expenditure rule augmented by medium-term debt targets.

Suggested Citation

  • Tilman Brück & Rudolf Zwiener, 2004. "Fiscal Policy Rules for Stabilisation and Growth: A Simulation Analysis of Deficit and Expenditure Targets in a Monetary Union," Discussion Papers of DIW Berlin 427, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp427
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    More about this item

    Keywords

    Fiscal policy; International policy coordination; Simulation;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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