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EMU: Optimal Fiscal Strategy and the Punishment Effectiveness

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  • Radu Vranceanu
  • Thierry Warin

Abstract

This paper investigates the ability of the Stability and Growth Pact to prevent governments in the “euro zone” from running excessive budget deficits. It is shown that in a static two‐country game, the Pareto‐optimal strategy of no excess deficits cannot be systematically enforced, whatever the toughness of the sanction under the Pact. However, in a multiperiod setting, the Pareto‐optimal configuration of no excess deficits would prevail even if no sanctions were applied to deviant governments. In this case, neither a heavily punitive SGP, nor a centralized budget appears to be helpful in the EMU context.

Suggested Citation

  • Radu Vranceanu & Thierry Warin, 2001. "EMU: Optimal Fiscal Strategy and the Punishment Effectiveness," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 494-504, August.
    • Handle: RePEc:bla:reviec:v:9:y:2001:i:3:p:494-504
    DOI: 10.1111/1467-9396.00295
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    Cited by:

    1. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
    2. repec:kap:iaecre:v:11:y:2005:i:1:p:29-38 is not listed on IDEAS
    3. Thierry Warin, 2005. "The Hidden Structural Features of the Fiscal Rule: A European Saga," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(1), pages 29-38, February.
    4. Thierry Warin, 2005. "Stability and Growth Pact: An Index to Trigger an Early Warning Earlier?," Middlebury College Working Paper Series 0502, Middlebury College, Department of Economics.
    5. Thierry Warin, 2005. "A Note on International Fiscal Policy Practices," Middlebury College Working Paper Series 0520, Middlebury College, Department of Economics.

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