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Business cycle determinants and fiscal policy: a panel ARDL approach for EMU

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<mark>Journal publication date</mark>06/2016
<mark>Journal</mark>Journal of Economic Asymmetries
Volume13
Number of pages12
Pages (from-to)57-68
Publication statusPublished
Early online date2/02/16
Original languageEnglish

Abstract

In a monetary union, fiscal policy is probably the most important tool in dealing with country-specific fluctuations. This paper addresses some fundamental economic questions regarding the determinants of business cycles in the EMU in the time period 1995- 2012. More precisely, it acknowledges the significant role of fiscal policy and estimates relevant models for EMU countries where trade openness and other crucial variables are investigated. Various relevant econometric techniques have been employed, such as Panel ARDL. Social benefits are found to be the most important variable, whereas capital expenditures and indirect taxes are the major pro-cyclical variables. Furthermore, the formation of the EMU, along with the increasing trade openness, suggests a clear cut countercyclical effect. In other words, the common monetary policy and the deeper financial integration constitute reasons for the decrease in the magnitude of the fluctuations.