Is discretionary fiscal policy a mitigating mechanism that counteracts business cycle fluctuations in the European Monetary Union?

The aim of the thesis is to evaluate the reaction in fiscal stance in EMU with the purpose to investigate if there is a need for discretionary fiscal policy as a stabilizing mechanism due to the existence of country-specific disparities in order to counteract business cycle fluctuations in the Monetary Union. The second objective is to analyse the role of discretionary fiscal policy during three downturns. The data range from 1992 to 2009 and consist of yearly time series. A Two-Stage Least Square model was used to calculate the reaction in cyclically ad-justed primary government balance to the variation in output gap, government debt, mone-tary gap, election year and at last to the government behaviour in response to booms and busts. Statistically significant results from both country-specific and panel data show that discretionary fiscal policy has been countercyclical since 1992 and throughout the period. From the evaluation of discretionary fiscal policy behaviour during the three downturns it is clear that the general fiscal behaviour was more procyclical for the estimation groups during the first downturn as opposed to the latest two