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Breaking the stability pact: was it predictable?

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  • Luigi Bonatti
  • Annalisa Cristini

Abstract

We show analytically that the credibility problem which has affected the European Stability Pact originates from the insufficient distinction between two reasons for having binding fiscal constraints. The first reason deals with the governments� tendency to neglect the effects of their fiscal policy on foreign governments (fiscal free-riding). The second reason follows from the governments� tendency to raise debt by lowering taxes or increasing expenditures, and then to leave it to their successors (fiscal short-termism). An enforcement mechanism relying on governments� collusion works if the fiscal constraints are not calibrated for curing fiscal short-termism but only for preventing fiscal free-riding.

Suggested Citation

  • Luigi Bonatti & Annalisa Cristini, 2007. "Breaking the stability pact: was it predictable?," Department of Economics Working Papers 0714, Department of Economics, University of Trento, Italia.
    • Handle: RePEc:trn:utwpde:0714
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    Cited by:

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    2. Amélie Barbier-Gauchard & Kea Baret & Alexandru Minea, 2021. "National fiscal rules and fiscal discipline in the European Union," Applied Economics, Taylor & Francis Journals, vol. 53(20), pages 2337-2359, April.
    3. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Tim Jenkinson & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2009. "Chapter 1: The European Economy: Macroeconomic Outlook and Policy," EEAG Report on the European Economy, CESifo, vol. 0, pages 11-57, February.
    4. Kea BARET & Theophilos PAPADIMITRIOU, 2019. "On the Stability and Growth Pact compliance: what is predictable with machine learning?," Working Papers of BETA 2019-48, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Onorante, Luca & Pedregal, Diego J. & Pérez, Javier J. & Signorini, Sara, 2010. "The usefulness of infra-annual government cash budgetary data for fiscal forecasting in the euro area," Journal of Policy Modeling, Elsevier, vol. 32(1), pages 98-119, January.
    6. Bonatti, Luigi & Cristini, Annalisa, 2008. "Breaking the Stability Pact: Was it predictable?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 793-810.
    7. Arcalean, Calin, 2018. "Dynamic fiscal competition: A political economy theory," Journal of Public Economics, Elsevier, vol. 164(C), pages 211-224.

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    More about this item

    Keywords

    Fiscal policy; Policy coordination; Capital formation; Free-riding; Short-termism.;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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