Is fiscal policy in the euro area Ricardian?

Nikki Panjer, Leo de Haan, Jan Jacobs

Onderzoeksoutput: Working paperAcademic

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According to the so-called ‘fiscal theory of the price level’ (FTPL), under a non-Ricardian regime the price level has to adjust to fulfil the government's budget constraint. In contrast, under a Ricardian regime, government balances adjust in order to preserve government solvency. We empirically determine whether a Ricardian or a non-Ricardian regime is more plausible for the euro area, following the research strategy of Canzoneri, Cumby, and Diba (2001). A Vector AutoRegressive (VAR) model for the primary government balance and the government debt is estimated for the period 1980q2-2013q4. Our model uses dummy interaction terms to account for the breaks due to the introduction of the Euro Convergence Criteria (ECC) and the start of the global financial crisis, respectively. No evidence is found in favour of either regime for the pre-ECC period. In the post-ECC period, a Ricardian regime is more plausible. Some evidence points in the direction of a non-Ricardian regime for the period after the start of the financial crisis.
Originele taal-2English
Plaats van productieAmsterdam
UitgeverDe Nederlandsche Bank
Aantal pagina's33
StatusPublished - 2017

Publicatie series

NaamDNB Working Paper
UitgeverijDe Nederlandsche Bank

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