Fiscal delegation in a monetary union: instrument assignment and stabilization properties

Henrique Basso and James Costain

No 1710, Working Papers from Banco de España

Abstract: Motivated by the failure of fiscal rules to eliminate deficit bias in the euro area, this paper analyzes an alternative policy regime in which each Member State government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short-and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable “austerity” when it responds to fi scal shocks.

Keywords: independent fiscal 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: 62 pages
Date: 2017-03
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1710

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