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Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU

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  • António Afonso
  • Luís Martins

Abstract

This paper provides new insights about the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data for 14 European Union countries over the period 1970-2012. Different measures for assessing fiscal consolidations based on the changes in the cyclically adjusted primary balance were calculated. A similar ad-hoc approach was used to compute monetary expansions, in order to include them in the assessment of non-Keynesian effects for different budgetary components. Panel Fixed Effects estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer and expenditure-based consolidations contribute positively for its success, whilst the opposite is the case for tax-based ones.

Suggested Citation

  • António Afonso & Luís Martins, 2014. "Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU," Working Papers Department of Economics 2014/12, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    • Handle: RePEc:ise:isegwp:wp122014
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    Cited by:

    1. António Afonso & Frederico Silva Leal, 2019. "Fiscal episodes in the EMU: Elasticities and non-keynesian effects," Working Papers REM 2019/97, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Afonso, António & Huart, Florence & Tovar Jalles, João & Stanek, Piotr, 2022. "Twin deficits revisited: A role for fiscal institutions?," Journal of International Money and Finance, Elsevier, vol. 121(C).
    3. Afonso, António & Alves, José & Jalles, João Tovar, 2022. "The (non-)Keynesian effects of fiscal austerity: New evidence from a large sample," Economic Systems, Elsevier, vol. 46(2).
    4. Ibrar Hussain & Jawad Hussain & Arshad Ali & Shabir Ahmad, 2021. "A Dynamic Analysis of the Impact of Fiscal Adjustment on Economic Growth: Evidence From Pakistan," SAGE Open, , vol. 11(2), pages 21582440211, June.
    5. Valentina Butmalai & Nicoleta Cristache & Alina-Florentina Saracu & Irina Olimpia Susanu & Aura Colan, 2024. "Keynesian and Non-Keynesian Effects of Fiscal Consolidation," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 2, pages 77-83.
    6. Piotr Ciżkowicz & Grzegorz Parosa & Andrzej Rzońca, 2022. "Fiscal tensions and risk premium," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 833-896, August.
    7. António Afonso & Jaromír Baxa & Michal Slavík, 2018. "Fiscal developments and financial stress: a threshold VAR analysis," Empirical Economics, Springer, vol. 54(2), pages 395-423, March.
    8. António Afonso & Sérgio Gadelha & Agatha Silva, 2020. "Public Debt And Economic Growth In Brazil," Working Papers REM 2020/0148, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    9. António Afonso & Frederico Silva Leal, 2022. "Fiscal episodes in the Economic and Monetary Union: Elasticities and non‐Keynesian effects," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 571-593, January.

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    More about this item

    Keywords

    fiscal consolidation; monetary expansion non-Keynesian effects; panel data; probit;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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