FISCAL POLICY RULES IN A MONETARY UNION: INCENTIVES AND MORAL HAZARD
Andre G. Fourcans, ESSEC Business School
Thierry Warin, Minda de Gunzburg CES, Harvard University, Department of Economics, Middlebury College
Key Words: Monetary union, Economic integration, Fiscal rule, Stability and Growth Pact
JEL classification: E61, E62, E63, F02, F42.
This paper was presented at the 14th International Conference of the International Trade and Finance Association in San Antonio, Texas, May 19-22, 2004.
Download the Paper (PDF format) - May 19, 2004
Tell a colleague about it.
Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.
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.
SUGGESTED CITATION:
Andre G. Fourcans and Thierry Warin,
"FISCAL POLICY RULES IN A MONETARY UNION: INCENTIVES AND MORAL HAZARD"
(May 2004).
International Trade and Finance Association Conference Papers.
International Trade and Finance Association 15th International Conference.
Working Paper 6.
http://services.bepress.com/itfa/15th/art6
