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EMU: Optimal Fiscal Strategy and the Punishment Effectiveness

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  • Vranceanu, Radu
  • Warin, Thierry

Abstract

This paper investigates the ability of the Stability and Growth Pact to prevent governments in the "euro zone" from running excessive budget deficits. It is shown that in a static two-country game, the Pareto-optimal strategy of no excess deficits cannot be systematically enforced, whatever the toughness of the sanction under the Pact. However, in a multiperiod setting, the Pareto-optimal configuration of no excess deficits would prevail even if no sanctions were applied to deviant governments. In this case, neither a heavily punitive SGP, nor a centralized budget appears to be helpful in the EMU context. Copyright 2001 by Blackwell Publishing Ltd.

Suggested Citation

  • Vranceanu, Radu & Warin, Thierry, 2001. "EMU: Optimal Fiscal Strategy and the Punishment Effectiveness," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 494-504, August.
  • Handle: RePEc:bla:reviec:v:9:y:2001:i:3:p:494-504
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    References listed on IDEAS

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    3. Rajesh Chadha & Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 2000. "Computational Analysis of the Impact on India of the Uruguay Round and the Forthcoming WTO Trade Negotiations," William Davidson Institute Working Papers Series 312, William Davidson Institute at the University of Michigan.
    4. Bernard Hoekman & Carlos Braga, 1997. "Protection and Trade in Services: A Survey," Open Economies Review, Springer, pages 285-308.
    5. Horn, Henrik & Levinsohn, James, 2001. "Merger Policies and Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 111(470), pages 244-276, April.
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    8. David L. Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 79-99.
    9. Deardorff, Alan V., 2001. "Fragmentation in simple trade models," The North American Journal of Economics and Finance, Elsevier, pages 121-137.
    10. Deardorff, A.V., 2000. "Financial Crisis, Trade, and Fragmentation," Working Papers 458, Research Seminar in International Economics, University of Michigan.
    11. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
    12. repec:fth:michin:422 is not listed on IDEAS
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    Cited by:

    1. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
    2. repec:kap:iaecre:v:11:y:2005:i:1:p:29-38 is not listed on IDEAS
    3. Thierry Warin, 2005. "Stability and Growth Pact: An Index to Trigger an Early Warning Earlier?," Middlebury College Working Paper Series 0502, Middlebury College, Department of Economics.
    4. Thierry Warin, 2005. "The Hidden Structural Features of the Fiscal Rule: A European Saga," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 29-38.

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