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Reconciling Stability and Growth; Smart Pacts and Structural Reforms

  • Roel M. W. J. Beetsma
  • Xavier Debrun

This paper analyzes 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. The model shows that a pact may harm structural reforms, sacrificing future growth for present stability. 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. A pact becomes more attractive (“smarter”) if it takes into account the fiscal impact of structural reforms, in line with a recent proposal by the European Commission.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/174.

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Length: 34
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/174
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  1. Saint-Paul, Gilles, 2002. "Macroeconomic Fluctuations and the Timing of Labour Market Reforms," CEPR Discussion Papers 3646, C.E.P.R. Discussion Papers.
  2. Saint-Paul, Gilles, 1999. "The Political Economy of Employment Protection," CEPR Discussion Papers 2109, C.E.P.R. Discussion Papers.
  3. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  4. Rogoff, Kenneth, 1990. "Equilibrium Political Budget Cycles," American Economic Review, American Economic Association, vol. 80(1), pages 21-36, March.
  5. 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).
  6. Gert Schnabel, 2002. "Output trends and Okun's law," BIS Working Papers 111, Bank for International Settlements.
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