Mr.Philippe Wingender

Francesca G Caselli

This paper estimates the effects of the Maastricht treaty’s fiscal criterion on EU countries’ general government deficits. We combine treatment effects methods with bunching estimation, and find that the 3 percent deficit rule acts as a “magnet”, increasing the number of observations around the threshold, while reducing the occurrence of both large government deficits and surpluses. After the rule is adopted, the distribution of government deficits among EU countries displays 20 percent excess mass around the deficit ceiling compared to a counterfactual distribution in which countries have the same observable characteristics but without the fiscal rule. Most of the bunching response comes from a reduction in the number of high deficit observations. We also find that the average treatment effect on fiscal deficits is positive and statistically significant. Finally, we derive country-specific impacts under a rank invariance assumption and find that all EU countries have seen their fiscal position improve on average as a result of the deficit rule.

Bunching at 3 Percent: The Maastricht Fiscal Criterion and Government Deficits

Bertrand Gruss

Mr.Rudolfs Bems

Mr.Francesco Grigoli

Many argue that improvements in monetary policy frameworks in emerging market economies over the past few decades, have made them more resilient to external shocks. This paper exploits the May 2013 taper tantrum in the United States to study the reaction of 18 large emerging markets to an external shock, conditioning on their degree of inflation expectations' anchoring. We find that while the tapering announcement negatively affected growth prospects regardless of the level of anchoring, countries with weakly anchored inflation expectations experienced larger exchange rate pass-through to consumer prices, hence comparatively higher inflation. We conclude that efforts to improve the extent of anchoring of inflation expectations in emerging markets pay off, as they ease the trade-off that central banks face when external shocks weaken growth prospects and trigger currency depreciations.

Francesca G Caselli

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