Potential Output and Fiscal Rules in a Monetary Union under Asymmetric Information 2nd ed

L. Marattin and S. Meraglia

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: We analyze fiscal rules within a Monetary Union in the presence of (i) asymmetric information on member states potential output and (ii) bail-out among member states. The first-best deficit is contingent on the cycle, that is, on member states output gap. In the presence of asymmetric information and bailout, the first-best deficit is not implementable. Bail-out lowers the scope for signalling (discrimination) by member states (lenders) and induces overborrowing by member states characterized by a low output gap. The Monetary Union can design a mechanism such that a member state with a smaller negative output gap runs an optimal budget deficit upon receiving a transfer form the Union. We show that, this cyclically-contingent fiscal framework Pareto dominates the cyclically-adjusted fiscal rule currently enforced by the European Monetary Union. Our model can then account for a situation where both asymmetric information over cyclical positions and the presence of bail-out among member states does not induce borrowing distortions.

JEL-codes: D82 E62 F33 F34 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-eec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp1063

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