| Author(s): |
doc. Ing. Ondřej Schneider MPhil., Ph.D., Petr Hedbavny, Jan Zápal
|
| Type: |
Articles in refereed journals |
| Year: |
2007 |
| Number: |
1 |
| ISSN / ISBN: |
ISSN 1802-4696 |
| Published in: |
AUCO-Czech Economic Review |
| Publishing place: |
Praha |
| Keywords: |
fiscal policy, European Union, sustainability |
| JEL codes: |
E6, H6, H87 |
| Suggested Citation: |
|
| Grants: |
Fiscal Policy in Enlarged European Union: Rules vs. discretion.
|
| Abstract: |
In this paper, we set out to examine an efficient fiscal-policy framework for a monetary union. We illustrate that fiscal policy’s bias toward budget deficit only temporarily ceased at the end of the 20th century as European countries endeavored to qualify for euro-zone membership, which compelled strict limits on budgetary deficits. We then explore which mechanisms might instill a sense of fiscal disciple in governments. We find that most mechanisms suffer from the incentive-incompatible setup whereby governments restrict their own fiscal-policy freedom. We argue that even multilateral fiscal rules, such as the EU’s Stability and Growth Pact, suffer from the same endogeneity flaw. Consequently, we argue that a fiscal rule must incorporate an external authority that would impartially assess fiscal-policy developments. Using U.S. debt and bond-market data at the state level, we show that financial markets represent a good candidate as, vis-à-vis the American states, they do differentiate state debt according to the level of debt. We thus argue for a fiscal institution – what we call the Fiscal Sustainability Council– that would actively bring financial markets into the fiscal-policy process, and we explain the technique whereby this could be effected. |
| Downloadable: |
2007-1_3 Hedbavny, Schneider, Zapal
|
