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

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  • Alessandra Casella

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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Bibliographic Info

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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Publication status: published as Economic Policy, Vol. 29 (October 1999): 323-361.
Handle: RePEc:nbr:nberwo:7278

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