Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU

We provide new insights into the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data from 14 European Union countries, over the period of 1970–2013. Different measures were calculated for assessing fiscal consolidations, based on the changes in the cyclically adjusted primary balance. A similar ad hoc approach was used to compute monetary episodes. Panel estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer consolidations contribute positively to its success, whilst the opposite is the case for revenue-based ones.