Performance of Fiscal Policy in an Economic and Monetary Union

We analyze the efficacy of fiscal policy of a small economy being a member of economic and monetary union. Basing our research on simple static and dynamic macroeconomic models we demonstrate that fiscal policies might display positive effects in the short run, but with time, positive effects of fiscal expansion tend to vanish or even might produce undesired results. That conclusion is arrived thanks to the application of a dynamic numerical simulation of the fiscal impulse. Spectacular results of fiscal policies pursued by a given country in the short run, resulting in economic upturn, are achieved in part, at the expense of other members of the monetary union. Policy makers, being guided by short-term benefits, might engineer a situation in which to the reduction in budgetary revenues does not correspond an adequate reduction in expenditures. We argue that it is indispensable to safeguard the adherence to the constraints agreed to in the Pact of Stability and Growth irrespective of political difficulties that might ensue.