Reconciling Stability and Growth: Smart Pacts and Structural Reforms
This Paper analyses the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. We provide suggestive evidence that structural reforms - in particular labour market reforms - may lead to substantial outlays by the government, for example to buy political support. To the extent that the reform package entails up-front costs, the model shows that a pact may harm structural reforms, sacrificing future growth for present stability. Since electoral uncertainty creates an expansive fiscal bias, the welfare gains brought about by a pact depend on a trade-off between the reduction in the deficit bias and the induced reduction in the amount of structural reform. Imposing a pact becomes more attractive if it takes into account the up-front costs from structural reforms when evaluating the member states' fiscal stance. Therefore, the analysis lends support to a recent proposal by the European Commission for a more flexible implementation of the Stability and Growth Pact in this respect.
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| Date of creation: | Jun 2003 |
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| Handle: | RePEc:cpr:ceprdp:3930 |
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References listed on IDEAS
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- Gilles Saint Paul, 1999.
"The political economy of employment protection,"
Economics Working Papers
355, Department of Economics and Business, Universitat Pompeu Fabra.
- Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
- Saint-Paul, Gilles, 1999. "The Political Economy of Employment Protection," CEPR Discussion Papers 2109, C.E.P.R. Discussion Papers.
- Kenneth Rogoff, 1987.
"Equilibrium Political Budget Cycles,"
NBER Working Papers
2428, National Bureau of Economic Research, Inc.
- Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
- Saint-Paul, Gilles, 2004.
"Macroeconomic Fluctuations and the Timing of Labor Market Reform,"
IDEI Working Papers
314, Institut d'Économie Industrielle (IDEI), Toulouse.
- Saint-Paul, Gilles, 2002. "Macroeconomic Fluctuations and the Timing of Labor Market Reform," IDEI Working Papers 146, Institut d'Économie Industrielle (IDEI), Toulouse.
- Saint-Paul, Gilles, 2002. "Macroeconomic Fluctuations and the Timing of Labour Market Reforms," CEPR Discussion Papers 3646, C.E.P.R. Discussion Papers.
- Saint-Paul, Gilles, 2002. "Some Thoughts on Macroeconomic Fluctuations and the Timing of Labor Market Reform," IZA Discussion Papers 611, Institute for the Study of Labor (IZA).
- Gert Schnabel, 2002. "Output trends and Okun's law," BIS Working Papers 111, Bank for International Settlements.
- Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
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