The present paper uses a two-country overlapping generation framework in order to assess the implications of the degree of fiscal discipline on the fiscal policy effectiveness in a currency union. The results show that, initially, a fiscal stimulus implemented under the condition of returning to a balanced budget leads to a higher increase in per capita output and consumption compared to a fiscal expansion with permanently higher public debt. However, in the medium run, the strict fiscal discipline case leads to an output recession despite the increase in private per capita consumption whereas a loosening of the fiscal discipline helps avoid the recession at the cost of higher public debt. The overlapping-generations framework shows also the demographic impact on the fiscal policy effectiveness under different degrees of fiscal discipline.
Currency union is the next step on the way to a complete European integration. Association Agreements for countries accessing EU structures after 1 May 2004 do not contain the opt-out clause, which is synonymous to the obligation of their acceptance of the common currency. The basic condition of entering the eurozone is meeting the legal requirements and criteria of convergence which define detailed economic conditions. After 2004, euro began to function in Malta, Cyprus, Slovenia and Slovakia, and from 1st January 2011, after meeting all the criteria, Estonia joined the euroland as the seventeenth country. Other countries which are obliged to adopt the euro, Poland included, are at various stages of preparation, but according to data from February 2011 none of them as yet meets the convergence criteria.
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