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Euro membership and fiscal reaction functions

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  • Weichenrieder, Alfons J.
  • Zimmer, Jochen

Abstract

The paper uses fiscal reaction functions for a panel of euro-area countries to investigate whether euro membership has reduced the responsiveness of countries to shocks in the level of inherited debt compared to the period prior to succession to the euro. While we find some evidence for such a loss in prudence, the results are not robust to changes in the specification, such as an exclusion of Greece from the panel. This suggests that the current debt problems may result to a large extent from preexisting debt levels prior to entry or from a larger need for fiscal prudence in a common currency, while an adverse change in the fiscal reaction functions for most countries does not apply.

Suggested Citation

  • Weichenrieder, Alfons J. & Zimmer, Jochen, 2013. "Euro membership and fiscal reaction functions," SAFE Working Paper Series 18, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewp:18
    DOI: 10.2139/ssrn.2265312
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    More about this item

    Keywords

    debt sustainability; fiscal reaction function; euro area;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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