Globalisation, EMU and fiscal discipline : evidence from OECD countries

Since the start of EMU national fiscal policy in the Eurozone can be conducted almost without payingany attention to consequences for the exchange rate. This might lower fiscal discipline. Offsetting forcescould result from increasing capital mobility and openness within EMU which can be expected toincrease fiscal discipline. In order to shed light on the empirical relevance of these counteracting forces,the impact of the exchange rate regime and a number of other variables on primary deficits is analysed in a panel estimation for 20 OECD countries from 1970 onwards. The conclusion is that the exchange rate regime as such is only of slight relevance for the fiscal balance - a result backing an optimistic view on fiscal discipline under EMU. The disciplining effects of openness and liberalised capital markets work in the same direction. (Aussenwirtschaft (Zürich)/SWP)