Avocates of formal fiscal restraints on the member states of the European Monetary Union often argue that US experience proves that a monetary union needs such constraints to guarantee the stability of the common currency. We show, first, that the origin of formal fiscal restraints on US state governments is unrelated to monetary questions. Second, we show that the same is true for similar constraints in Australia. Third, we show that the incidence of fiscal restraints is strongly correlated with the central government's ownership of the national tax base. The implication for Europe is that fiscal restraints are unnecessary as long as the EU retains a high degree of fiscal decentralization.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1247.
Find related papers by JEL classification: F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management 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
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Jürgen von Hagen, 2005.
"Political Economy of Fiscal Institutions,"
Discussion Papers
149, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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