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“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?

Author

Listed:
  • Óscar Afonso

    () (CEMPRE, Faculdade de Economia do Porto, Universidade do Porto)

  • Rui Henrique Alves

    () (Faculdade de Economia do Porto, Universidade do Porto)

Abstract

The creation of the European Monetary Union has led to a substantial increase in the discussion of the importance of fiscal discipline and adequate fiscal rules in such a monetary union. The “European” solution has been challenged by many authors and politicians: among the main questions discussed in recent years, we find the use of the same rules for different situations in Member-Countries, particularly in terms of economic dimension and economic level of development. We develop a model of a monetary union between two countries that may differ in economic dimension and in the level of development. By solving transitional dynamics towards the steady state through numerical computation, the model allows us to examine the impact of fiscal shocks that may lead to excessive deficits. Our results suggest that the implications of such deficits depend on whether they occur in the small and less developed country or in the big and more developed one. In this context, we argue that an excessive deficit should be temporarily allowed in the case of the small and less developed country, in order to improve economic convergence and wages within the union.

Suggested Citation

  • Óscar Afonso & Rui Henrique Alves, 2006. "“To Deficit or Not to Deficit”: Should European Fiscal Rules Differ Among Countries?," FEP Working Papers 219, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:219
    as

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    References listed on IDEAS

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    Cited by:

    1. Emanuele Bacchiocchi & Elisa Borghi & Alessandro Missale, 2011. "Public Investment under Fiscal Constraints," Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 11-42, March.

    More about this item

    Keywords

    Monetary Union; SGP; Excessive Deficits; Technological-Knowledge Gap; Numerical Computation.;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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