A simple and flexible alternative to the Stability and Growth Pact deficit ceilings. Is it at hand?
We use a simple theoretical model of a monetary union where myopic discretionary fiscal policies generate excessive debt accumulation in steady state and inefficiently delayed debt adjustment following a shock. We advocate the adoption of a flexible debt targeting approach. By setting a long-term debt target and by raising the political cost associated to deviations from the optimal pace of debt reversal following a shock¸ institutional design induces the fiscal policymaker to implement unbiased discretionary responses to shocks. Since the power to discipline fiscal policymakers rests in the hands of national voters, this outcome can be achieved by increasing the transparency of the decision-making process, where national voters understand the long-term consequences of fiscal policies. In practice, we call for clearer and more focused supervision tasks for the European Commission and for a more active role of national Parliaments whenever a disagreement arises between the Commission and a national government.
|Date of creation:||Jul 2010|
|Date of revision:||Jul 2010|
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- Julio J. Rotemberg & Michael Woodford, 1999.
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- Marco Buti & Sylvester Eijffinger & Daniele Franco, 2003. "Revisiting the Stability and Growth Pact: grand design or internal adjustment?," European Economy - Economic Papers 2008 - 2015 180, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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- Jürgen von Hagen & Susanne Mundschenk, 2002. "The Functioning of Economic Policy Coordination," Chapters, in: EMU and Economic Policy in Europe, chapter 7 Edward Elgar Publishing.
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- Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December. Full references (including those not matched with items on IDEAS)
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