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Fiscal Discipline as a Social Norm: The European Stability Pact

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  • JEAN-PAUL FITOUSSI
  • FRANCESCO SARACENO

Abstract

This paper reviews the arguments for and against the "Stability and Growth Pact." We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite and plausible conclusions. Empirical evidence in favor of a Pact-like rule is also scant. We therefore suggest the view that the Stability Pact is a public social norm, that countries obey in order to preserve reputation among the other members of the European Union. Using this extreme-but not implausible-hypothesis, we build a simple model similar in spirit to Akerlof's (1980) seminal work on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. Increased heterogenity generally has the effect of further reducing aggregate welfare; we conclude that the problems posed by the Pact/social norm are likely to increase following the enlargement, when a number of countries anxious to prove their "soundness" joined the club. Copyright � 2008 Wiley Periodicals, Inc..

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 10 (2008)
Issue (Month): 6 (December)
Pages: 1143-1168

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Handle: RePEc:bla:jpbect:v:10:y:2008:i:6:p:1143-1168

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Citations

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Cited by:
  1. Jean-Paul Fitoussi & Francesco Saraceno, 2008. "Fiscal Discipline as a Social Norm: The European Stability Pact," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 1143-1168, December.
  2. Frédéric Marty, 2007. "Partenariats public-privé, règles de discipline budgétaire, comptabilité patrimoniale et stratégies de hors bilan," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2007-29, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2014. "French Public Finances at Risk?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 1-19, Februar.
  4. Jérôme Creel & Paul Hubert & Francesco Saraceno, 2013. "Assessing future sustainability of french public finances," Sciences Po publications 2013-11, Sciences Po.
  5. Baldi, Guido, 2013. "Fiscal Policy Institutions and Economic Transition in North Africa," MPRA Paper 48677, University Library of Munich, Germany.
  6. Shirai, Sayuri, 2009. "Euの通貨統合と金融・財政政策の規律
    [EU Currency Union and Disciplines for Financial・Moneatry Policies]
    ," MPRA Paper 15713, University Library of Munich, Germany.

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