Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU

Abstract

This paper deals with fiscal policy coordination. In particular, it focuses on the question of how fiscal policy can be coordinated inside EMU, where countries still differ considerably in terms of cyclical behaviour and importance of country-specific shocks and well as the fiscal policy multipliers. To answer this question, we carry out comparative analyses on both automatic stabilisers and policy effects. We also scrutinise the uncertainty, which is related to different indicators of fiscal policy, as well as the forecast uncertainty in terms of the cyclical situation. We find strikingly large differences in both the cyclical effects and policy effects that together with considerable forecasting uncertainty suggest that policy coordination may be enormously difficult. Not surprisingly, we also find that there is very little evidence of fiscal policy coordiation. The main reason for this state of affairs is probably the differences in past policy behaviour among the EU and as well as OECD countries.