Tradable Deficit Permits: Efficient Implementation of the Stability Pacin the European Monetary Union

Alessandra Casella ()

No 7278, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation. The scheme exploits countries' incentives to minimize their costs, is transparent, flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions. In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run.

New Economics Papers: this item is included in nep-cdm, nep-eec and nep-pub
Date: 1999-08
Note: IFM ITI
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Journal Article: Tradable deficit permits:efficient implementation of the Stability Pact in the European Monetary Union (1999)
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