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Tradable Deficit Permits: Efficient Implementation of the Stability Pacin the European Monetary Union

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Alessandra Casella

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Abstract

Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation. The scheme exploits countries' incentives to minimize their costs, is transparent, flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions. In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7278.

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Date of creation: Aug 1999
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Handle: RePEc:nbr:nberwo:7278

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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. Óscar Afonso & Rui Henrique Alves, 2006. "“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?," FEP Working Papers 219, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  2. Assar Lindbeck & Dirk Niepelt, 2005. "Improving the SGP: Taxes and Delegation rather than Fines," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Assar Lindbeck, 2005. "Sustainable Social Spending," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    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. Guiseppe Pisauro, . "Intergovernmental Relations and Fiscal Discipline: Between Common Tax Resources and Soft Budget Constraints," IMF Working Papers 01/65, International Monetary Fund. [Downloadable!]
  6. Alessandra Casella, 2000. "Market Mechanisms for Policy Decisions: Tools for the European Union," NBER Working Papers 8027, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Casella, Alessandra, 2001. "Market Mechanisms for Policy Decisions," CEPR Discussion Papers 2667, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Bernd Irlenbusch & Matthias Sutter, 2006. "An experimental analysis of voting in the Stability and Growth Pact in the European Monetary Union," Public Choice, Springer, vol. 129(3), pages 417-434, December. [Downloadable!] (restricted)
  9. Marie-Laure Breuillé, 2007. "Tradable deficit permits: a way to ensure sub-national fiscal discipline?," EconomiX Working Papers 2007-17, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  10. Kari Alho, 2002. "The Stability Pack and Inefficiencies in Fiscal Policy Making in EMU," Discussion Papers 715, The Research Institute of the Finnish Economy. [Downloadable!]
  11. Rui Henrique Alves & Óscar Afonso, 2006. "The “New” Stability and Growth Pact: More Flexible, Less Stupid?," FEP Working Papers 218, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
    Other versions:
  12. Paolo Manasse, 2006. "Procyclical Fiscal Policy: Shocks, Rules, and Institutions - A View From MARS," IMF Working Papers 06/27, International Monetary Fund. [Downloadable!]
  13. van Aarle, Bas & Di Bartolomeo, Giovanni & Engwerda, Jacob & Plasmans, Joseph, 2002. "Staying Together or Breaking Apart: Policy-makers' Endogenous Coalitions Formation in the European Economic and Monetary Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  14. Richard Hule & Matthias Sutter, 2003. "Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?," Empirica, Springer, vol. 30(1), pages 25-38, March. [Downloadable!] (restricted)
  15. Kilian Bizer & Zulia Gubaydullina & Hazim Rahahleh & Werner Sesselmeier, 2007. "FTPL-Perspective on Tradable Deficit Permits in the EMU," Atlantic Economic Journal, International Atlantic Economic Society, vol. 35(3), pages 259-267, September. [Downloadable!] (restricted)
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