Economic Themes (2013) 51 (2) 1, 235-250


Olgica Bošković, Svetlana Popović, Nikola Njegovan

Abstract: Analysis of fiscal discipline and convergence in EMU is important for several reasons. Empirical studies have confirmed the connection between fiscal policy and national macroeconomic performance. Fatas and Mihov showed that governments that use aggressive fiscal policy, create significant macroeconomic instability, reflected in higher output volatility. Fiscal convergence stimulates the convergence of economic cycles because it eliminates specific fiscal shocks. Considering that both Maastricht convergence criteria and the Stability and Growth Pact require fiscal discipline before joining EMU, their goal is to bring the countries that are joining the EU, closer to the optimal currency area. Convergence criteria require from the future members to have similar economic policies and to stimulate a more balanced growth and development. That way, the fiscal discipline and the stronger correlation of economic cycles will better prepare the candidate countries for the single currency. Fiscal discipline also affects the financial markets. Differences between national fiscal policies may slow down the integration of financial markets, because different national fiscal positions could mean different sovereign debt risk premiums, depending on the anticipated budget deficit and public debt.

Keywords:  optimal currency area; convergence; test of hypothese with panel data; testing for individual and time effects.

PDF file