A simple and flexible alternative to the Stability and Growth Pact deficit ceilings. Is it at hand?

Vito Muscatelli, Piergiovanna Natale (piergiovanna.natale@unimib.it) and Patrizio Tirelli

No 195, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We use a simple theoretical model of a monetary union where myopic discretionary fiscal policies generate excessive debt accumulation in steady state and inefficiently delayed debt adjustment following a shock. We advocate the adoption of a flexible debt targeting approach. By setting a long-term debt target and by raising the political cost associated to deviations from the optimal pace of debt reversal following a shock¸ institutional design induces the fiscal policymaker to implement unbiased discretionary responses to shocks. Since the power to discipline fiscal policymakers rests in the hands of national voters, this outcome can be achieved by increasing the transparency of the decision-making process, where national voters understand the long-term consequences of fiscal policies. In practice, we call for clearer and more focused supervision tasks for the European Commission and for a more active role of national Parliaments whenever a disagreement arises between the Commission and a national government.

JEL-codes: E52 E61 E63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-07, Revised 2010-07
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A simple and flexible alternative to Stability and Growth Pact deficit ceilings. Is it at hand? (2012)
Working Paper: A Simple and Flexible Alternative to the Stability and Growth Pact Deficit Ceilings. Is it at hand? (2003)
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