Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

Table 4.

Testing for interactions between the autonomy of monetary policy
and the fiscal adjustment variable¹

Absolute value of t-statistics in parentheses, * significant at 10% level, ** significant at 5%, *** significant at 1%.

1: all equations in Table 4 also include the same control variables (not reported) as in Table 2 (for columns 1-4) and Table 3 (for columns 5-6).
They also include the dummy variable for monetary policy autonomy described in the main text.

m.p: marginal probability.

2: instruments (levels of explanatory variables) lagged 2 and 3 periods are used in difference equations,
and instruments (first differences of explanatory variables) lagged 1 period are used in level equations

Source: Author's calculations.

5. Summary and conclusions

This paper is an empirical attempt to determine whether structural reforms in labour and
product markets bear some relationship with fiscal positions and fiscal adjustment processes. A
priori, a sound fiscal position should facilitate the implementation of structural reforms, insofar as
it provides room for the compensation of losers as well as for crowding in resources if reforms -
e.g. in the labour market- create short-run economic slack. Conversely, fiscal adjustment -defined
as a positive change in the cyclically-adjusted primary fiscal balance- may hamper the ability of
governments to later implement other types of unpopular measures such as structural reforms,
particularly those that would further depress aggregate demand. Against this backdrop, the
question arises as to whether the persistently poor state of public finances, combined with fiscal
adjustment during the run-up to EMU, has slowed down the reform process in a number of EU
countries during the past decade.

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