A simple and flexible alternative to the Stability and Growth Pact deficit ceilings. Is it at hand?
AbstractWe use a simple theoretical model of a monetary union where myopic discretionary fiscal policies generate excessive debt accumulation in steady state and inefficiently delayed debt adjustment following a shock. We advocate the adoption of a flexible debt targeting approach. By setting a long-term debt target and by raising the political cost associated to deviations from the optimal pace of debt reversal following a shock¸ institutional design induces the fiscal policymaker to implement unbiased discretionary responses to shocks. Since the power to discipline fiscal policymakers rests in the hands of national voters, this outcome can be achieved by increasing the transparency of the decision-making process, where national voters understand the long-term consequences of fiscal policies. In practice, we call for clearer and more focused supervision tasks for the European Commission and for a more active role of national Parliaments whenever a disagreement arises between the Commission and a national government.
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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 195.
Length: 33 pages
Date of creation: Jul 2010
Date of revision: Jul 2010
Other versions of this item:
- Anton Muscatelli & Piergiovanna Natale & Patrizio Tirelli, 2003. "A Simple and Flexible Alternative to the Stability and Growth Pact Deficit Ceilings. Is it at hand?," CESifo Working Paper Series 1006, CESifo Group Munich.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
- NEP-CBA-2010-09-11 (Central Banking)
- NEP-EEC-2010-09-11 (European Economics)
- NEP-MAC-2010-09-11 (Macroeconomics)
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