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This thesis focuses on the consequences of European monetary integration and the associated coordination of fiscal policies. Initially, the euro appeared a resounding success. The global financial crisis of 2008/09 however hit the euro area hard and exposed severe macroeconomic imbalances within, and between, member states. To help understand the emergence of these imbalances, chapter 2 rewinds the clock to 1996, when, in anticipation of the introduction of the euro, interest rates started to sharply decline in many prospective Southern European member states. We show how falling rates sparked capital inflows, a domestic demand boom, and growth of the nontradable sector. Capital inflows did however not benefit the tradable sector, leading to a divergence between external debt and capacity to repay. Chapters 3 and 4 focus on fiscal policy coordination in EMU. In chapter 3, we highlight that the design of Europe's fiscal rules encourages strategic behavior. More specifically, the official forecasts used to judge compliance with the rules tend to be overly optimistic when the 3%-threshold threatens to bind. Chapter 4 shows that, despite such side effects, Eurozone governments do actively tighten their fiscal policy in response to fiscal recommendations. Finally, chapter 5 zooms in on the euro crisis and its aftermath. We show that, during 2009-2012, shocks to Spanish and Italian sovereign spreads induced sizable spillovers to almost all other euro area countries. Since the announcement of the ECB's Outright Monetary Transactions, such spillovers have largely disappeared, greatly enhancing the stability of the Eurozone as a whole.

This paper finds optimal fiscal rule parameter values and measures the effects of imposing fiscal rules using a default model calibrated to an economy that in the absence of a fiscal rule pays a significant sovereign default premium. The paper also studies the case in which the government conducts a voluntary debt restructuring to capture the capital gains from the increase in its debt market value implied by a rule announcement. In addition, the paper shows how debt ceilings may reduce the procyclicality of fiscal policy and thus consumption volatility

Unfunded public pension and Other Post Employment Benefits (OPEB) liabilities impose major threats to local fiscal sustainability, which increases governments' default risk and crowds out funding for essential local services. To close the funding gaps, localities may apply a wide range of fiscal instruments, including increasing taxes, fees, and user charges, issuing debt and bonds, obtaining grants and/or decreasing expenditures. This research compares the US local fiscal choice behavior in the context of the fiscal federalism framework. The goal is to identify the ideal mix of constitutional fiscal rules to preserve local fiscal sustainability. Not only should the rules aim to minimize local adverse fiscal behavior pre-crisis, which may include excessive spending, large accumulations of unfunded liabilities, and over-reliance on external grants, but also allow strong local fiscal adaptive capacity post-crisis. The findings help localities identify any effective and prudent fiscal options available to close their pension funding gaps and contribute to the overall sub-national fiscal institutional reforms. Theoretically, this research introduces a novel analytical framework pertaining to local fiscal sustainability by separating pre-crisis and post-crisis institutional analysis and by consolidating two historically viewed as two competing paradigms, public choice and public finance. I argue that the two approaches are complementary rather than contradictory since public choice theory sets up an institutional prerequisite for normative outcomes to be realized and prevents the occurrence of extreme circumstances. The ideal mix of formal fiscal rules, thus, should induce the balanced budget rule that applies to all budget items, stringent spending and debt limits, and institutionalized local tax authority and stable tax structure, but not tax limits. Tax limits are less effective in constraining government than spending and debt limits due to fiscal gimmicks. Moreover, stringent tax limits could significantly limit local governments' ability to bounce back on their own. This research also found that cities do apply different fiscal strategies to reduce exogenous shocks, given their unique fiscal institutions in place. Furthermore, cities with fewer institutional constraints exhibit a faster speed of adjustment. However, certain institutional variables, such as public union size and tax authority, might not have the same fiscal implications as predicted by the theory. Cities often manage to cut their short-term spending regardless of the size of their public unions. A broad range of tax authority does not imply greater local revenue-generating capacity. Own source revenue autonomy might be a better indicator of local fiscal adaptive capacity. ; Doctor of Philosophy ; Unfunded public pension and Other Post Employment Benefits (OPEB) liabilities impose major threats to local fiscal sustainability, which increases governments default risk and crowds out funding for essential local services. To close the funding gaps, localities may apply a wide range of fiscal instruments, including increasing taxes, fees, and user charges, issuing debt and bonds, obtaining grants and/or decreasing expenditures. This research compares the US local fiscal choice behavior in the context of the fiscal federalism framework. The goal is to identify the ideal mix of constitutional fiscal rules to preserve local fiscal sustainability. Not only should the rules aim to minimize local adverse fiscal behavior pre-crisis, which may include excessive spending, large accumulations of unfunded liabilities, and over-reliance on external grants, but also allow strong local fiscal adaptive capacity post-crisis. The findings help localities identify any effective and prudent fiscal options available to close their pension funding gaps and contribute to the overall sub-national fiscal institutional reforms. Theoretically, this research introduces a novel analytical framework pertaining to local fiscal sustainability by separating pre-crisis and post-crisis institutional analysis and by consolidating two historically viewed as two competing paradigms, public choice and public finance. I argue that the two approaches are complementary rather than contradictory since public choice theory sets up an institutional prerequisite for normative outcomes to be realized and prevents the occurrence of extreme circumstances. The ideal mix of formal fiscal rules, thus, should induce the balanced budget rule that applies to all budget items, stringent spending and debt limits, and institutionalized local tax authority and stable tax structure, but not tax limits. Tax limits are less effective in constraining government than spending and debt limits due to fiscal gimmicks. Moreover, stringent tax limits could significantly limit local governments ability to bounce back on their own. This research also found that cities do apply different fiscal strategies to reduce exogenous shocks, given their unique fiscal institutions in place. Furthermore, cities with fewer institutional constraints exhibit a faster speed of adjustment. However, certain institutional variables, such as public union size and tax authority, might not have the same fiscal implications as predicted by the theory. Cities often manage to cut their short-term spending regardless of the size of their public unions. A broad range of tax authority does not imply greater local revenue-generating capacity. Own source revenue autonomy might be a better indicator of local fiscal adaptive capacity.

We ask whether fiscal rules constrain incumbents from using fiscal policy tools for reelection purposes. Using data on fiscal rules provided by the IMF for a sample of 77 (advanced and developing) countries over the 1984-2015 period, we find that strong fiscal rules dampen political budget cycles. Our results are remarkably robust against inclusion of media freedom and the level of government debt as explanatory variables. Furthermore, we find a strong effect of fiscal rules in, amongst others, countries with fewer veto players, left-wing governments, established democracies, and more globalized economies. In addition, the effect of fiscal rules on political budget cycles seems to be stronger after the global financial crisis, reflecting post-crisis expansion in the number of countries with strong fiscal rules, notably in the European Union.

We estimate short- and long-run elasticities of private consumption for fiscal instruments, using a Fixed Effects model for the 19-euro area countries during the period of 1960-2017, to assess how fiscal elasticities vary during fiscal episodes. According to the results, positive "tax revenue" elasticities indicate that consumers have a Ricardian behaviour, whereby they perceive an increase in taxation to be a sign of future government spending. "Social benefits" appear to have a non-keynesian effect on private consumption. In addition, using a narrative approach to identify fiscal consolidations, it is seen that private consumption continues to exhibit a non-keynesian response to tax increases, both in the short and long-run, and "other expenditures" have a recessive impact during "normal times". Furthermore, "social benefits" are more contractionary in consolidations than in both expansions and "normal times". Additionally, after the launch of the EMU, expansionary fiscal consolidations became harder to observe, and "other expenditure" and "investment" lost their non-keynesian role. ; info:eu-repo/semantics/publishedVersion

Fiscal consolidation in Serbia was built on broad-based expenditure cuts, better revenue performance, and related structural reforms and pro-growth policies. In 2015 the actual fiscal performance exceeded the original and revised deficit targets set in the IMF program. The final outcome was a deficit of 3.7 percent of GDP, a huge 2.9 percent improvement over 2014. The result contains a 2.5 percentage points of structural fiscal adjustment with 1.5 percentage points in permanent expenditure cuts and 1.0 percentage point in structural revenue improvements. This increases front loading and allows more fiscal space for the implementation of pending structural reforms. The program had a beneficial impact on economic growth which turned out positive at 0.8 percent, 1.3 percentage points above IMF and IFI projections. With this performance Serbia may become a case of 'expansionary austerity', which demonstrates that fiscal consolidation programs designed in line with sound principles and synchronized with key structural reforms and pro-growth policies can generate growth. Carefully selected expenditure cuts combined with pro-growth revenue collection efforts can have expansionary effect on growth even under the most difficult circumstances. The political economy issues of fiscal consolidation and structural reforms gain increasing importance in the second year of the program, two months before the early parliamentary elections. Fresh thinking is needed to demonstrate that the completion of difficult reforms is a win-win for all, and almost everybody loses if reforms are stalled or abandoned.

This paper aims to investigate the effects of various fiscal policy measures for small and open economies by analysing the implications of fiscal shocks in the Baltic countries based on data for the period from 1995 to 2018. For this purpose, we have chosen structural VAR estimation methods following Blanchard, O., & Perotti, R. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics, 117(4), 1329–1368, approach and relied on local projections for robustness checks. We find that the impact on growth of direct taxes, government consumption and public investment is strong and persistent in the analysed cases. Although the responses of FDI to fiscal shocks are less consistent as compared to output, in most cases, we get strong and persistent negative reactions in FDI to increasing tax burden.

This paper aims to investigate the effects of various fiscal policy measures for small and open economies by analysing the implications of fiscal shocks in the Baltic countries based on data for the period from 1995 to 2018. For this purpose, we have chosen structural VAR estimation methods following Blanchard, O., & Perotti, R. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics, 117(4), 1329–1368, approach and relied on local projections for robustness checks. We find that the impact on growth of direct taxes, government consumption and public investment is strong and persistent in the analysed cases. Although the responses of FDI to fiscal shocks are less consistent as compared to output, in most cases, we get strong and persistent negative reactions in FDI to increasing tax burden.