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A common pool theory of supranational deficit ceilings

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  • Krogstrup, Signe
  • Wyplosz, Charles

Abstract

The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Deficits can be used to finance both unproductive and productive public spending. An optimally set supranational deficit ceiling is examined and welfare is compared to the unconstrained outcome and to the case of nationally set deficit ceilings. The supranational deficit ceiling is found to be welfare improving relative to similar national arrangements, but does not fully eliminate the deficit bias unless combined with a domestic fiscal institution allowing for precommitment to productive public spending.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 2 (February)
Pages: 269-278

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:2:p:269-278

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Deficit bias Fiscal institutions Fiscal rules Common pool Stability and growth pact;

References

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Citations

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Cited by:
  1. Kempf, Hubert & von Thadden, Leopold, 2013. "When do cooperation and commitment matter in a monetary union?," Journal of International Economics, Elsevier, vol. 91(2), pages 252-262.
  2. Schilirò, Daniele, 2012. "The crisis of euro’s governance: institutional aspects and policy issues," MPRA Paper 40861, University Library of Munich, Germany.
  3. Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2014. "The Tragedy of the Commons and Inflation Bias in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 71-91, February.
  4. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Working Papers 17884, National Bureau of Economic Research, Inc.
  5. Marcela Eslava, 2011. "The Political Economy Of Fiscal Deficits: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 645-673, 09.
  6. Rülke, Jan-Christoph & Frenkel, Michael & Lis, Eliza, 2013. "Do budget balance rules anchor budget balance expectations? -- Some international evidence," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80050, Verein für Socialpolitik / German Economic Association.
  7. Georgia Kaplanoglou & Vassilis T. Rapanos, 2011. "The Greek Fiscal Crisis and the Role of Fiscal Governance," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 48, Hellenic Observatory, LSE.
  8. Pessoa, Argentino, 2011. "The Euro Area sovereign debt crisis: Some implications of its systemic dimension," MPRA Paper 35328, University Library of Munich, Germany.
  9. Balatoni, András & Tóth G., Csaba, 2012. "Az új magyar adósságszabály értékelése
    [Assessment of the new regulations on debt]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1107-1137.
  10. Josef Schroth, 2013. "Fiscal policy coordination in monetary unions," 2013 Meeting Papers 74, Society for Economic Dynamics.
  11. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers 615, Bruegel.
  12. Xavier Debrun & Keiko Takahashi, 2011. "Independent Fiscal Councils in Continental Europe: Old Wine in New Bottles?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 9(3), pages 44-50, October.

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