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We estimate various panel fiscal reaction functions, including those of the main categories of general government revenue and expenditure for 12 Euro area member states over the 1970-2013 period. We find that in the peripheral countries where sovereign bond yields decreased sharply in the years 1996-2007, fiscal stance ceased to respond to sovereign debt accumulation. This was due to lack of sufficient adjustment in government current expenditure and direct taxes. In contrast, in the core member states, which did not benefit from yields' convergence related to the Euro area establishment, responsiveness of fiscal stance to inherited sovereign debt increased during 1996-2007. This was achieved mainly through pronounced adjustments in government current expenditure. The findings are robust to various changes in modelling approach. [ABSTRACT FROM AUTHOR]

We analyse determinants of trust in the European Central Bank (ECB). Our main finding is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and in contrast with the ‘fundamental shock’ hypothesis which implies positive effects of aggressive cuts for trust in the ECB. The result is robust to various changes in the modelling approach. [ABSTRACT FROM PUBLISHER]

The article analyses the possible effect of keeping the interest rates near zero on the natural interest rate following the bursting of the asset bubble in 2008 and focuses on economies needing post-crisis restructuring. Topics discussed include the adverse effects resulting from a persistent decline in the natural interest rate and the need for the central in an economy needing post-crisis restructuring to voluntarily set a lower bound for interest rates cuts to reduce risks.