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Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions and the No-Bailout Rule

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  • Eichengreen, Barry
  • von Hagen, Jurgen

Abstract

Avocates of formal fiscal restraints on the member states of the European Monetary Union often argue that US experience proves that a monetary union needs such constraints to guarantee the stability of the common currency. We show, first, that the origin of formal fiscal restraints on US state governments is unrelated to monetary questions. Second, we show that the same is true for similar constraints in Australia. Third, we show that the incidence of fiscal restraints is strongly correlated with the central government's ownership of the national tax base. The implication for Europe is that fiscal restraints are unnecessary as long as the EU retains a high degree of fiscal decentralization.
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  • Eichengreen, Barry & von Hagen, Jurgen, 1995. "Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions and the No-Bailout Rule," Center for International and Development Economics Research (CIDER) Working Papers 233417, University of California-Berkeley, Department of Economics.
  • Handle: RePEc:ags:ucbewp:233417
    DOI: 10.22004/ag.econ.233417
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    References listed on IDEAS

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    1. Laves, Walter H. C., 1935. "Foreign Bondholders and American State Debts. By Reginald C. McGrane. (New York: The Macmillan Company. 1935. Pp. vii, 410.)," American Political Science Review, Cambridge University Press, vol. 29(4), pages 686-687, August.
    2. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    3. Hughes Hallett, Andrew & Vines, David, 1991. "Adjustment Difficulties within a European Monetary Union: Can They be Reduced?," CEPR Discussion Papers 517, C.E.P.R. Discussion Papers.
    4. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, vol. 44(2), pages 199-210, March.
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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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