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Reconciling Stability and Growth: Smart Pacts and Structural Reforms

Author

Listed:
  • Mr. Roel M. W. J. Beetsma
  • Mr. Xavier Debrun

Abstract

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.

Suggested Citation

  • Mr. Roel M. W. J. Beetsma & Mr. Xavier Debrun, 2003. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," IMF Working Papers 2003/174, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/174
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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