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A simple and flexible alternative to Stability and Growth Pact deficit ceilings. Is it at hand?

  • Muscatelli, Vito A.
  • Natale, Piergiovanna
  • Tirelli, Patrizio

We model a monetary union where fiscal discretion generates excessive debt accumulation in steady state and inefficiently delayed debt adjustment following shocks. By setting a debt target and raising the political cost of deviating from the optimal pace of debt reversal¸ institutional design induces fiscal policymakers to implement unbiased responses to shocks. This is partly achieved by increasing the transparency of the decision-making process. We therefore call for more focused supervision tasks for the European Commission and for parliamentary discussion whenever a disagreement arises between the Commission and a national government.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 28 (2012)
Issue (Month): 1 ()
Pages: 14-26

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Handle: RePEc:eee:poleco:v:28:y:2012:i:1:p:14-26
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