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Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the EMU

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  • Robert P. Inman

Abstract

The `Excessive Deficit Procedure' of the Maastricht Treaty on Economic and Monetary Union proposes two fiscal convergence conditions for entry and continued membership in the EMU: 1) a country's overall budget deficit for each fiscal year must be equal to or below 3% of GDP, and 2) a country's stock of gross public debt must be equal to or less than 60% of GDP. Will the current EMU Excessive Deficit Procedure work as an effective constraint on countries' deficit behaviors? When understood within the context of a political economy model of deficit behavior, recent U.S. evidence on balanced budget rules strongly suggests that effective deficit constraints must use ex post deficit accounting, must be constitutionally grounded, must be enforced by an open and politically independent review panel or court with significant sanctions for violations, and costly to amend. While ex post, constitutionally grounded, and difficult to amend, current EMU rules are not enforced, at present, by an open and politically independent review panel using significant penalties. The ability of the EMU's deficit procedure to constrain in doubt. Institutional reforms that will strengthen the EMU's balanced budget procedures are discussed.

Suggested Citation

  • Robert P. Inman, 1996. "Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the EMU," NBER Working Papers 5838, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5838
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    Cited by:

    1. Joe A. Stone, 2016. "Do Balanced-Budget Rules Increase Growth?," Bulletin of Economic Research, Wiley Blackwell, vol. 68(1), pages 79-89, January.
    2. Alberto F. Alesina & Roberto Perotti, 1999. "Budget Deficits and Budget Institutions," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 13-36, National Bureau of Economic Research, Inc.
    3. James M. Poterba & Kim Rueben, 1999. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 181-208, National Bureau of Economic Research, Inc.
    4. Ulpiano Ayala Oramas & Roberto Perotti, 2000. "The Colombian budget process," Working Papers Series. Documentos de Trabajo 002535, Fedesarrollo.
    5. Abdallah Shehata & Prof. Lobna Abdelatif, 2006. "Fiscal Sustainability and the Role of the State: a New Analytical Framework," EcoMod2006 272100082, EcoMod.
    6. Landon, Stuart & Smith, Constance, 2017. "Does the design of a fiscal rule matter for welfare?," Economic Modelling, Elsevier, vol. 63(C), pages 226-237.
    7. Azzimonti, Marina & Battaglini, Marco & Coate, Stephen, 2016. "The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy," Journal of Public Economics, Elsevier, vol. 136(C), pages 45-61.
    8. Ulpiano Ayala Oramas & Roberto Perotti, 2000. "The colombian budget process," Working Papers Series. Documentos de Trabajo 003574, Fedesarrollo.
    9. Mr. Anthony M Annett, 2006. "Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe’s Fiscal Framework," IMF Working Papers 2006/116, International Monetary Fund.
    10. C. Randall HENNING & Martin KESSLER, 2012. "Fiscal Federalism: US History for Architects of Europe’s Fiscal Union," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 1-31.
    11. Jakob De Haan & Helge Berger & David‐Jan Jansen, 2004. "Why has the Stability and Growth Pact Failed?," International Finance, Wiley Blackwell, vol. 7(2), pages 235-260, July.
    12. Paolo Biraschi, "undated". "Searching for the optimal EMU fiscal rule:an ex-post analysis of the SGP reform proposals," Working Papers wp2008-7, Department of the Treasury, Ministry of the Economy and of Finance.
    13. Popescu, Razvan-Florin & Prodan, Sergiu, 2010. "The analysis of budget rules and macroeconomic implications in several developed economies," MPRA Paper 25897, University Library of Munich, Germany, revised 2010.
    14. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
    15. J. de Haan & H. Berger & D. Jansen, 2003. "The end of the stability and growth pact?," WO Research Memoranda (discontinued) 748, Netherlands Central Bank, Research Department.
    16. Francesco Papadia & Gian Ruggiero, 1999. "Central Bank Independence and Budget Constraints for a Stable Euro," Open Economies Review, Springer, vol. 10(1), pages 63-90, February.
    17. Baskaran, Thushyanthan, 2009. "Did the Maastricht treaty matter for macroeconomic performance?," MPRA Paper 30106, University Library of Munich, Germany.
    18. Clavijo Vergara, Sergio, 2002. "Viabilidad de la deuda externa colombiana," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34869, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    19. Simonit, Silvia, 2002. "Los gastos tributarios y las renuncias tributarias en América Latina," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34873, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    20. Zareh Asatryan & Thushyanthan Baskaran & Theocharis Grigoriadis & Friedrich Heinemann, 2017. "Direct Democracy and Local Public Finances under Cooperative Federalism," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(3), pages 801-820, July.
    21. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
    22. Currie, Elizabeth, 2002. "The potential role of government debt management office in monitoring and managing contingent liabilities," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34871, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    23. Maurice Obstfeld, 1997. "Europe's Gamble," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 241-317.
    24. Nazareth, Paula Alexandra & Porto, Luiz Fernando Lopes, 2002. "As finanças dos municípios brasileiros: o caso do Rio de Janeiro," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34882, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    25. Jonathan Millar, 1997. "The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization," Staff Working Papers 97-15, Bank of Canada.

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    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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