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The role of fiscal delegation in a monetary union: a survey of the political economy issues

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Author Info

  • Costain, James

    ()
    (Banco de España.)

  • de Blas, Beatriz

    ()
    (Departamento de Análisis Económico (Teoría e Historia Económica), Universidad Autónoma de Madrid.)

Abstract

Current proposals to address the European sovereign debt crisis envision some sort of fiscal union to complement the Economic and Monetary Union, backed by stronger sanctions against countries that deviate from budget balance. We argue that sanctions are an indirect approach to balancing budgets, and that member states, and Europe as a whole, could instead consider delegating effective fiscal instruments with a direct budgetary impact to an independent authority. Outside of a fiscal union, a solvent country could establish an independent fiscal authority at the national level, with a mandate to maintain long-term budget balance. Delegating a few powerful fiscal instruments to an institution of this type could cut off speculation about fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union, delegating one or more fiscal levers of each Eurozone member state to a national or European fiscal authority could eliminate moral hazard without relying on sanctions per se. Many fiscal instruments can serve to balance budgets, but in the context of a monetary union the chosen instrument should ideally be one that increases competitiveness when recession looms. The instrument should also be one that is quick and simple to adjust, with a large budgetary impact and minimal redistributional consequences. For consistency with these criteria, we argue that fiscal adjustments should operate on the spending side, rather than the revenue side, and that spending adjustments should affect the prices the government pays, instead of the quantities of goods and services it purchases. We discuss in detail how a system of this sort could be implemented.

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Bibliographic Info

Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number 2012/11.

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Length: 59 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:uam:wpaper:201211

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Keywords: Fiscal delegation; public spending; sovereign debt; monetary union.;

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References

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  1. Buiter, Willem H, 2007. "Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate," CEPR Discussion Papers 6099, C.E.P.R. Discussion Papers.
  2. Xavier Debrun & David Hauner & Manmohan S. Kumar, 2009. "Independent Fiscal Agencies," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 44-81, 02.
  3. Bruche, Max & Suarez, Javier, 2010. "Deposit insurance and money market freezes," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 45-61, January.
  4. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2012. "Fiscal devaluations," Working Papers 12-10, Federal Reserve Bank of Boston.
  5. Eric M. Leeper, 2009. "Anchoring Fiscal Expectations," Caepr Working Papers 2009-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. Suarez, Javier, 2010. "The Spanish Crisis: Background and Policy Challenges," CEPR Discussion Papers 7909, C.E.P.R. Discussion Papers.
  7. Pedro Gomes, 2011. "Fiscal policy and the labour market: the effects of public sector employment and wages," European Economy - Economic Papers 439, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. Zsolt Darvas, 2010. "Fiscal Federalism in Crisis: Lessons for Europe from the US," Working Papers 1002, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest, revised 10 Sep 2010.
  9. Laurence Seidman, 2001. "Reviving Fiscal Policy," Challenge, M.E. Sharpe, Inc., vol. 44(3), pages 17-42, May.
  10. Maximo Camacho & Gabriel Perez-Quiros, 2004. "Are European business cycles close enough to be just one?," Computing in Economics and Finance 2004 16, Society for Computational Economics.
  11. Jürgen von Hagen & Andrew Hughes Hallett & Rolf Strauch, 2001. "Budgetary Consolidation in EMU," European Economy - Economic Papers 148, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  12. James Costain & Beatriz de Blas, 2012. "Smoothing shocks and balancing budgets in a currency union," Banco de Espa�a Working Papers 1207, Banco de Espa�a.
  13. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  14. Pedro Teles & Bernardino Adao & Isabel Correia, 2005. "Exchange Rate Regimes," 2005 Meeting Papers 382, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Henrique S. Basso & James Costain, 2013. "Fiscal delegation in a monetary union with decentralized public spending," Banco de Espa�a Working Papers 1311, Banco de Espa�a.
  2. Beatriz de Blas & James Costain, 2012. "Smoothing shocks and balancing budgets in a currency union^M," 2012 Meeting Papers 975, Society for Economic Dynamics.
  3. Andrea Bonilla Bolanos, 2014. "External Vulnerabilities And Economic Integration: Is The Union Of South American Nations A Promising Project?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 39(2), pages 97-131, June.

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