Prudent Fiscal Policy in the Presence of Bailout Expectations
AbstractThis paper analyzes the introduction of an automatic correction mechanism (ACM) in an economic union whose member states expect to be bailed out in the case of a debt crisis. An ACM can be used to penalize governments that run deficits. We show that if the mechanism is appropriately structured, it can harden the governmental budget constraints. Thus, in the presence of an ACM, bailout expectations of a regional government do not lead to excessive borrowing. However, we find that simultaneous introduction of an ACM and a credible commitment not to bail out indebted regions may lead to inefficiently hard budget constraints and an overshoot of the policy objectives.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.
Volume (Year): 68 (2012)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.mohr.de/fa
Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
Find related papers by JEL classification:
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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.:
- David E. Wildasin, 2001.
"Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations,"
- Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
- Robin Boadway & Jean-François Tremblay, 2006. "A Theory of Fiscal Imbalance," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(1), pages 1-27, March.
- Marko Köthenbürger, 2006.
"Ex-Post Redistribution in a Federation: Implications for Corrective Policy,"
CESifo Working Paper Series
1754, CESifo Group Munich.
- Kothenburger, Marko, 2007. "Ex-post redistribution in a federation: Implications for corrective policy," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 481-496, April.
- Kothenburger, Marko, 2004.
"Tax competition in a fiscal union with decentralized leadership,"
Journal of Urban Economics,
Elsevier, vol. 55(3), pages 498-513, May.
- Marko Koethenbuerger, 2003. "Tax Competition in a Fiscal Union with Decentralized Leadership," CESifo Working Paper Series 943, CESifo Group Munich.
- Toshihiro Ihori, 2011. "Overlapping tax revenue, soft budget, and rent seeking," International Tax and Public Finance, Springer, vol. 18(1), pages 36-55, February.
- Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, vol. 90(2), pages 230-236, February.
- Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Wolpert).
If references are entirely missing, you can add them using this form.