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Abstract
The present paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of …fiscal rules, with particular attention to the Stability and Growth Pact in its old and reformed versions. The investigation suggests that fi…scal policy has had in the past a limited smoothing effect on the cycle, and therefore the cost of the old rules in the corrective arm of the Pact was also limited. As for the reform of the Pact, the analysis is overall supportive of the new country-speci…c Medium Term Objectives. The modifi…ed rules of the Excessive de…cit procedure are likely to give the governments only a limited extra leeway to reduce the variability of the cycle.
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