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Implementing the stability and growth pact - enforcement and procedural flexibility

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Author Info
Roel M.W. J. Beetsma () (Department of Economics, University of Amsterdam)
Xavier Debrun () (Fiscal Affairs Department, International Monetary Fund)

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Abstract

The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 433.

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Length: 55 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:ecb:ecbwps:20050433

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Related research
Keywords: Fiscal rules Stability and Growth Pact procedural flexibility deficits structural reforms.

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H6 - Public Economics - - National Budget, Deficit, and Debt

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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.:
  1. 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. [Downloadable!] (restricted)
  2. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August. [Downloadable!] (restricted)
  3. Beetsma, Roel & Debrun, Xavier, 2003. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," CEPR Discussion Papers 3930, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Xavier Debrun & Francesca Castellani, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund. [Downloadable!]
  5. von Hagen, Jürgen & Wolff, Guntram B., 2004. "What do deficits tell us about debt? : Empirical evidence on creative accounting with fiscal rules in the EU," Discussion Paper Series 1: Economic Studies 2004,38, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  6. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall. [Downloadable!] (restricted)
    Other versions:
  7. Ludger Schuknecht, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 421, European Central Bank. [Downloadable!]
  8. Hughes Hallett, Andrew & Jensen, Svend E. Hougaard, 2001. "Currency unions and the incentive to reform: are market mechanisms enough?," The North American Journal of Economics and Finance, Elsevier, vol. 12(2), pages 139-155, July. [Downloadable!] (restricted)
  9. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Ben D. Peletier & Robert A. J. Dur & Otto H. Swank, 1999. "Voting on the Budget Deficit: Comment," American Economic Review, American Economic Association, vol. 89(5), pages 1377-1381, December. [Downloadable!] (restricted)
  11. Milesi-Ferretti, Gian Maria, 2001. "Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting," CEPR Discussion Papers 2663, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 403-14, July. [Downloadable!] (restricted)
  13. Hallett, Andrew Hughes & Jensen, Svend E. Hougaard & Richter, Christian, 2005. "The European economy at the cross roads: Structural reforms, fiscal constraints, and the Lisbon Agenda," Research in International Business and Finance, Elsevier, vol. 19(2), pages 229-250, June. [Downloadable!] (restricted)
  14. Sibert, Anne, 1999. "Monetary Integration and Economic Reform," Economic Journal, Royal Economic Society, vol. 109(452), pages 78-92, January. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Krogstrup, Signe & Wyplosz, Charles, 2006. "A Common Pool Theory of Deficit Bias Correction," CEPR Discussion Papers 5866, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Ludger Schuknecht, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 421, European Central Bank. [Downloadable!]
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