Working Paper: CEPR ID: DP3635
Authors: Massimiliano Marcellino
Abstract: We derive a set of stylized facts on the effects of non-systematic fiscal policy in the four largest countries of the Euro area, and discuss their implications for the fiscal policy coordination debate, for the effectiveness of fiscal shocks in stabilizing the economies, and for the interaction of fiscal and monetary policy. We find relevant differences across countries in the effects of non-systematic fiscal policy, and substantial uncertainty about the size of these effects, which casts doubts on the possibility of a fiscal coordination. Moreover, expenditure shocks are usually rather ineffective in increasing output growth or reducing its volatility, and can require deficit financing. Tax policies also appear to have minor effects on output, and tax cuts could also require deficit financing. Finally, fiscal shocks appear to have an impact on interest rates, either direct or through the output gap and inflation while, in general, the effects of monetary policy on disbursements and receipts seem to be minor.
Keywords: fiscal policy; monetary policy; policy coordination; stabilization policy
JEL Codes: E62; E63; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonsystematic fiscal policy (E62) | output stabilization (E63) |
| expenditure shocks (E62) | output growth (O40) |
| expenditure shocks (E62) | output volatility (E23) |
| tax policies (H29) | output (C67) |
| tax cuts (H29) | deficit financing (H62) |
| tax shocks (H26) | output gap (E23) |
| fiscal shocks (E62) | interest rates (E43) |
| fiscal shocks (E62) | output gap (E23) |
| fiscal shocks (E62) | inflation (E31) |
| monetary policy (E52) | fiscal variables (E62) |