Fiscal delegation in a monetary union with decentralized public spending

Henrique Basso and James Costain

No 1311, Working Papers from Banco de España

Abstract: This paper studies the effects of delegating control of sovereign debt issuance to an independent authority in a monetary union where public spending decisions are decentralized. The model assumes that no policy makers are capable of commitment to a rule. However, consistent with Rogoff (1985) and with the recent history of central banking, it assumes that an institution may be designed to have a strong preference for achieving some clear, simple, quantitative policy goal. Following Beetsma and Bovenberg (1999), we show that in a monetary union where a single central bank interacts with many member governments, debt is excessive relative to a social planner’s solution. We extend their analysis by considering the establishment of an independent fiscal authority (IFA) mandated to maintain long-run budget balance. We show that delegating sovereign debt issuance to an IFA in each member state shifts down the time path of debt, because this eliminates aspects of deficit bias inherent in democratic politics. Delegating to a single IFA at the union level lowers debt further, because common pool problems across regions’ deficit choices are internalized. The establishment of a federal government with fiscal powers over the whole monetary union would be less likely to avoid excessive deficits, because only the second mechanism mentioned above would apply. Moreover, the effective level of public services would be lower, if centralized spending decisions are less informationally efficient

Keywords: fi scal authority; delegation; decentralization; monetary union; sovereign debt (search for similar items in EconPapers)
JEL-codes: E61 E62 F41 H63 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cdm, nep-dge, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Fiscal Delegation in a Monetary Union with Decentralized Public Spending (2016)
Working Paper: Fiscal Delegation in a Monetary Union with Decentralized Public Spending (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1311

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