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Tradable deficit permits:efficient implementation of the Stability Pact in the European Monetary Union

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Author Info
Alessandra Casella

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Abstract

"Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation. The scheme exploits countries' incentives to minimize their costs, is transparent and flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions. In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run." Copyright Centre for Economic Policy Research, Center for Economic Studies, Maison des Sciences de l'Homme, 1999 .

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1468-0327.00052
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Article provided by CEPR, CES, MSH in its journal Economic Policy.

Volume (Year): 14 (1999)
Issue (Month): 29 (October)
Pages: 321-362
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Handle: RePEc:bla:ecpoli:v:14:y:1999:i:29:p:321-362

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paolo Manasse, 2006. "Procyclical Fiscal Policy: Shocks, Rules, and Institutions - A View From MARS," IMF Working Papers 06/27, International Monetary Fund. [Downloadable!]
  2. Guiseppe Pisauro, . "Intergovernmental Relations and Fiscal Discipline: Between Common Tax Resources and Soft Budget Constraints," IMF Working Papers 01/65, International Monetary Fund. [Downloadable!]
  3. Marie-Laure Breuillé, 2007. "Tradable deficit permits: a way to ensure sub-national fiscal discipline?," EconomiX Working Papers 2007-17, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  4. Alessandra Casella, 2000. "Market Mechanisms for Policy Decisions: Tools for the European Union," NBER Working Papers 8027, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Xavier Debrun & Francesca Castellani, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund. [Downloadable!]
  6. van Aarle, Bas & Di Bartolomeo, Giovanni & Engwerda, Jacob & Plasmans, Joseph, 2002. "Staying Together or Breaking Apart: Policy-makers' Endogenous Coalitions Formation in the European Economic and Monetary Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  7. Óscar Afonso & Rui Henrique Alves, 2006. "“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?," FEP Working Papers 219, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
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