Has the Stability and Growth Pact Changed the Likelihood of Excessive Deficits in the European Union?

This paper presents an empirical analysis of excessive deficit spells in the European Union using transition data methods. Probabilities of transition between excessive and non-excessive deficit states are estimated with time-varying macroeconomic covariates as explanatory variables. The quantitative effects of discretionary fiscal and monetary policies and cyclical factors on transition probabilities are disentangled so that we can account for what factors and by how much they contributed to certain member countries' breaching of the Pact. Another finding is that the Stability and Growth Pact seems to have reinforced fiscal discipline in most of the member countries.