The Economics of European Integration. Chapter 18 Fiscal Policy and the Stability Pact. The Fiscal Policy Instrument. In a monetary union, the fiscal instrument assumes greater importance: the only macroeconomic policy instrument left at the national level
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G = G(y) and T = T(y) with G’< 0 and T’> 0.
Actual budget balance: B(y) = G(y) – T(y) with B’ > 0.
Cyclically adjusted balance: B(yp) = T(yp) - G(yp).
So, roughly: B(y) = B(yp) + B’(yp)(y - yp).
Budget balance (B)
The output gap and
the overall budget
tend to move together
The steady improvement of
the cyclically adjusted is not
directly refected in the actual
The track record of EU countries is not good:
Public debts in 2005 (% of GDP)
Overdraft facilities or any other type of credit facility with theECB or with the central banks of the Member States (hereinafter referredto as ‘national central banks’) in favour of Community institutionsor bodies, central governments, regional, local or other publicauthorities, other bodies governed by public law, or publicundertakingsof Member States shall be prohibited, as shall the purchase directlyfrom them by the ECB or national central banks of debt instruments. (Art. 101)
in the coming