EMU Enlargement, Stabilization Cost and Automatic Stabilizers

We use a new approach to assess long-term fiscal developments. Byanalyzing the time-varying behaviour of the two components ofgovernment spendingandrevenue–responsivenessandpersistence–,a feature not captured by automatic stabilisers, we are able to inferabout the sources of fiscal deterioration (improvement). Drawing onquarterly data, we estimate recursively these components withina system of government revenue and spending equations usinga Three-Stage Least Squaremethod for eight EuropeanUnion countriesplus the US. The results suggest that significant changes in the fiscalstance (including those related to the current crisis) are reflected in theestimates of persistence and responsiveness.