This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's "conventional wisdom" that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the "leaning against the wind" monetary policy approach.
The aim of this study is first to determine whether the fiscal policy among EMU countries have converged and then to identify the source of the convergence process. The convergence of fiscal policies was at the core of the fiscal criteria imposed by the Maastricht treaty but it may also have resulted from the economic and financial integration that preceded the Treaty. Some unit-root tests are implemented on the cross-country variance for various fiscal policy indicators where a break in the intercept and the trend is allowed to catch whether the convergence is due to institutional arrangements or to economic integration. We conclude that the fiscal position has converged but the break date, selected before 1992, indicates that the convergence process preceded the Maastricht treaty. Considering the fiscal receipts, the hypothesis of convergence is accepted only when they are adjusted from the cyclical component. The convergence of fiscal expenditures is finally clearly rejected.
Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.
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