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Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU

António Afonso
Publication Year 
JEL Code 
C23 - Models with Panel Data
E21 - Consumption; Saving
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
H5 - National Government Expenditures and Related Policies
H62 - Deficit; Surplus
We provide new insights into the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data from 14 European Union countries, over the period of 1970-2013. Different measures were calculated for assessing fiscal consolidations, based on the changes in the cyclically adjusted primary balance. A similar ad-hoc approach was used to compute monetary episodes. Panel estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed for 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 consolidations contribute positively to its success, whilst the opposite is the case for revenue-based ones.
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