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(Why) Is the Euro system intrinsically unstable?

Author

Listed:
  • Bernardo Maggi

    (Sapienza Universita' di Roma)

Abstract

In this study we focus on the dynamics of taxation, debt, and monetary stability in a currency union area. We specifically adapt our theoretical set up to the Euro zone with special emphasis on the countries affected by critical conditions of public debt. We deal with such a problem in a dynamic optimization perspective by referring to the optimal control literature and find the optimal taxation and composition by maturity of the debt as it follows from the Stability and Growth Pact (SGP). Critical results depend upon the accumulation over time of the past decisions on public expenses and the consequent high level of taxation rate according to which a probability of failure to comply the SGP is evaluated.

Suggested Citation

  • Bernardo Maggi, 2015. "(Why) Is the Euro system intrinsically unstable?," DSS Empirical Economics and Econometrics Working Papers Series 2015/1, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    • Handle: RePEc:sas:wpaper:20151
    as

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    File URL: http://www.dss.uniroma1.it/RePec/sas/wpaper/20151_maggi.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
    1. Maurice Obstfeld, 2013. "On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 31, pages 25-38, November.
    2. Mr. Evan C Tanner & Mr. Kevin J Carey, 2005. "The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output," IMF Working Papers 2005/207, International Monetary Fund.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. Galina Hale & Maurice Obstfeld, 2016. "The Euro And The Geography Of International Debt Flows," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 115-144, February.
    5. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    6. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
    7. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    8. Evan Tanner & Kevin Carey, 2008. "The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(11-12), pages 502-524, December.
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    More about this item

    Keywords

    Euro; Stability and Growth Pact; public debt.;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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