FISCAL POLICY RULES IN A MONETARY UNION: INCENTIVES AND MORAL HAZARD

Andre Fourcans () and Thierry Warin

No 1002, International Trade and Finance Association Conference Papers from International Trade and Finance Association

Abstract: This paper addresses the question of the efficacy of a fiscal rule such as the Stability and Growth Pact in Europe, and compares the latter to alternative rules. The model challenges the traditional comparative static analyses by proposing a filter for analysing such fiscal rules. The analysis sheds light on where the emphasis should be put on when establishing these rules. As countries are not handcuffed, they integrate the new constraints in their behaviors and may get incentives to infringe the regulation. The model does not conclude that deficit-ceiling rules are not worth implementing but that, whatever the established rules are, a moral hazard issue appears as far as governments adjust their behavior to the new rule. A key component of a fiscal rule is therefore the effective enforcement of the penalties associated. Presented 14th International Conference, San Antonio, Texas, May 2004.

Date: 2004-05-19
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