Advanced Search
MyIDEAS: Login to save this paper or follow this series

On Prosperity and Posterity: The Need for Fiscal Discipline in a Monetary Union

Contents:

Author Info

  • Carsten Detken

    (European Central Bank)

  • Vítor Gaspar

    (European Central Bank)

  • Bernhard Winkler

    (European Central Bank)

Abstract

We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy.

Download Info

If 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.
File URL: https://www.ua.pt/egi/ReadObject.aspx?obj=11014
Download Restriction: no

Bibliographic Info

Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 30.

as in new window
Length: 36 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:ave:wpaper:302005

Contact details of provider:
Postal: Campus Universitario de Santiago, 3810-193 Aveiro
Phone: +351 234 370 361
Fax: +351 234 370 215
Email:
Web page: http://www.ua.pt/egi/
More information through EDIRC

Related research

Keywords: fiscal spillover effects; common pool; overlapping generations; bond market integration; fiscal discipline; fiscal rules; European Monetary Union;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Silvia Ardagna & Francesco Caselli & Timothy Lane, 2004. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," NBER Working Papers 10788, National Bureau of Economic Research, Inc.
  2. Chang, Roberto, 1990. "International coordination of fiscal deficits," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 347-366, June.
  3. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
  4. Charlotte Christiansen, 2007. "Volatility-Spillover Effects in European Bond Markets," European Financial Management, European Financial Management Association, vol. 13(5), pages 923-948.
  5. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  6. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  7. Roger Gordon & Vitor Gaspar, 2001. "Home Bias in Portfolios and Taxation of Asset Income," NBER Working Papers 8193, National Bureau of Economic Research, Inc.
  8. Kearney, Colm & Poti, Valerio, 2006. "Correlation dynamics in European equity markets," Research in International Business and Finance, Elsevier, vol. 20(3), pages 305-321, September.
  9. Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
  10. Richard Goss, 2003. "Comment," Maritime Policy & Management, Taylor & Francis Journals, vol. 30(4), pages 357-362, October.
  11. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
  12. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-71, October.
  13. Robert-Paul Berben & W. Jos Jansen, 2005. "Bond Market and Stock Market Integration in Europe," DNB Working Papers 060, Netherlands Central Bank, Research Department.
  14. Restoy, Fernando, 1996. "Interest rates and fiscal discipline in monetary unions," European Economic Review, Elsevier, vol. 40(8), pages 1629-1646, November.
  15. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-93, June.
  16. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2003. "Sovereign risk premia in the European government bond market," ZEI Working Papers B 26-2003, ZEI - Center for European Integration Studies, University of Bonn.
  17. Detken, Carsten, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 0003, European Central Bank.
  18. Cohen, Daniel, 1985. "Inflation, wealth and interest rates in an intertemporal optimizing model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 73-85, July.
  19. Skintzi, Vasiliki D. & Refenes, Apostolos N., 2006. "Volatility spillovers and dynamic correlation in European bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(1), pages 23-40, February.
  20. Weil, Philippe, 1987. "Permanent budget deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 393-410, September.
  21. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
  22. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 503-532, October.
  23. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  24. Ardagna, Silvia & Caselli, Francesco & Lane, Timothy, 2004. "Fiscal discipline and the cost of public dept service: some estiames for OECD countries," Working Paper Series 0411, European Central Bank.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Philipp Paulus, 2006. "Brüssel, Frankfurt oder Basel - Wo muss das Problem steigender Staatsschulden in der Europäischen Währungsunion gelöst werden?," Otto-Wolff-Institut Discussion Paper Series 01/2006, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
  2. Jean-Paul Fitoussi & Francesco Saraceno, 2007. "Fiscal Discipline as a Social Norm: The European Stability Pact," Documents de Travail de l'OFCE 2007-22, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Benczes, Istvan, 2011. "Rules-based economic governance in the European Union: A reappraisal of national fiscal rules," MPRA Paper 34912, University Library of Munich, Germany.
  4. Otmar Issing, 2006. "Europe’s hard fix: the Euro area," International Economics and Economic Policy, Springer, vol. 3(3), pages 181-196, December.
  5. repec:spo:wpecon:info:hdl:2441/1482 is not listed on IDEAS
  6. António Afonso, 2007. "Public finances in Portugal: a brief longrun view," Working Papers Department of Economics 2007/01, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ave:wpaper:302005. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marta Ferreira Dias).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.