Convergence of fiscal policies in EMU: a unit-root tests analysis with structural break

Abstract

The aim of this study is first to determine whether the fiscal policy among EMU countries have converged and then to identify the source of the convergence process. The convergence of fiscal policies was at the core of the fiscal criteria imposed by the Maastricht treaty but it may also have resulted from the economic and financial integration that preceded the Treaty. Some unit-root tests are implemented on the cross-country variance for various fiscal policy indicators where a break in the intercept and the trend is allowed to catch whether the convergence is due to institutional arrangements or to economic integration. We conclude that the fiscal position has converged but the break date, selected before 1992, indicates that the convergence process preceded the Maastricht treaty. Considering the fiscal receipts, the hypothesis of convergence is accepted only when they are adjusted from the cyclical component. The convergence of fiscal expenditures is finally clearly rejected.

Acknowledgements

This work has been realized when the corresponding author was research associate at the University of Orléans. The views expressed herein are those of the author and do not necessarily reflect the views of the BCL.

Notes

¹ But Boone (1997) shows yet that the convergence of shocks was interrupted at the beginning of the 1990s certainly due to the German reunification.

² The correction for interest payments is not taken into account for the total current receipts as the focus is on interest payments which are much more important for the analysis.

³ The parameter λ was set to 100. The results are generally not modified when a smaller value is used or when an alternative method of adjustment is used. See Bouthevillain et al. (2001) for a detailed discussion on the choice of this value.

⁴ It corresponds to the ‘innovational outlier model’ termed by Perron (1997) where a break in the intercept and the slope is allowed to occur gradually.

⁵ Critical values obtained with alternative figures for ζ were also simulated but the results do not differ in quality.

⁶ Note that a trimming is necessary here.

⁷ See Bravo and Silvestre (2002) for a recent analysis.