How Do Fiscal Consolidation and Fiscal Stimuli Impact on the Synchronization of Business Cycles?

Abstract

Using quarterly data for a panel of advanced economies, we show that synchronized fiscal consolidation (stimulus) programmes in different countries make their business cycles more closely linked. We also find: (i) some evidence of decoupling when an inflation targeting regime is unilaterally adopted; (ii) an increase in business cycle synchronization when countries fix their exchange rates and become members of a monetary union; (iii) a positive effect of bilateral trade on the synchronization of business cycles. Global factors, such as a rise in global risk aversion and uncertainty and a reversal of nonstandard expansionary monetary policy, can also reduce the degree of co-movement of business cycles across countries. From a policy perspective, our work shows that an inflation targeting regime coupled with simultaneous fiscal consolidations can lead to more business cycle synchronization.

The Effect of Fiscal Policy Asymmetries on Business Cycle Correlation in the EU

“…We expected the change from floating to a fixed exchange rate regime had a higher impact on international transactions than the final adoption of the Euro when the exchange rate was already fixed, which is in line with Flood and Rose (2010). Thus, unlike Belke et al (2017), but similar to Agnello et al (2017), we controlled for ERM II membership. The ERM dummy had a value of 1 only if both countries were within the ERM II regime or had adopted the Euro for at least half the year; otherwise, the ERM dummy was 0.…”

“…Still, the traditional correlation measures remain standardly used in literature as well, as applied e.g. by Schleer and Sachs (2013); Degiannakis et al (2016); Agnello et al (2017); Gianelle et al (2017).…”

Fiscal consolidation effect in theory and practice

“…A hypothesis, on which fiscal policy is based, assumes that its realization helps to significantly decrease impact of financial crisis on the state of public finances as well as to improve the developing trend of national economies in the long run. Fiscal consolidation problem in EU have been studied in works by Gobbin and Van Aarle (2001), Afonso et al, (2012), Alesina et al, (1998Alesina et al, ( , 2006, Alesina and Ardagna (1998;, Agnello and Sousa (2014), Agnello et al (2016), Ardagna (2004), Blinder and Solow (1973), Giavazzi and Pagano (1995), , Josselin et al (2012), Oates (2002) and many others. But there are not so many resources about fiscal consolidation process in Ukraine.…”

On the determinants of economic growth: Empirical evidence from the Eurozone countries

“…The signed economic adjustment programmes were subject to draconian austerity fiscal adjustment policies. On the other hand, asymmetries were observed elsewhere as some Member States in the north showed greater resilience to the crisis (Agnello et al, 2016; Economic and Monetary Affairs Committee, 2014; Gros, 2012; Monastiriotis et al, 2013) and indeed they might have benefited as the Eurozone crisis has been characterized as a ‘bank run’ of deposits from the periphery to the north and the core of the Eurozone. So far, little has been said about the growth asymmetries in the Eurozone.…”