engleski

Historical Fiscal Stimulus Effectiveness for EMU Countries not Meeting Maastricht Criteria

The Keynesian fiscal policy view suggests to increase public spending, or decrease tax rate, in crisis situations (especially in the liquidity trap zone) aiming for multiplier effects on national income. Countries with high deficit-to- GDP and debt-to-GDP ratios will experience short term increase and long term reduction of these ratios (in compliance with Stability and Growth Pact criteria). Is this still true if we take into consideration that these countries have oscillating interest rate levels reflecting their default risk? Will fiscal policy expansion be effective or it will have relevant crowding out effects? This paper investigates, on a yearly panel of EMU countries not respecting SGP criteria, the impact of fiscal policy stimulus on historical (starting from single currency adoption) multipliers and its effect at macroeconomic level. Furthermore, if consumers and investors think that debt-financed is less costly than tax-financing spending, will this avoid or reduce crowding out? The data analysis will also highlight and break down the levels of debt and deficit in respect of GDP to see if and how they influence the incentives.

Fiscal stimulus, deficit, debt, crowding out

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