A Simple and Flexible Alternative to Stability and Growth Pact Deficit Ceilings: Is it at Hand?

TLDR: In this article, the authors model a monetary union where fiscal discretion generates excessive debt accumulation in steady state and inefficiently delayed debt adjustment following shocks, and call for more focused supervision tasks for the European Commission and for parliamentary discussion whenever a disagreement arises between the Commission and a national government.

About: This article is published in European Journal of Political Economy.The article was published on 2012-03-01 and is currently open access. It has received 66 citations till now. The article focuses on the topics: Debt adjustment & Stability and Growth Pact.

Figures

Figure 3 vividly illustrates the faltering performance of fiscal policies under the SGP regime. The change in the cyclically-adjusted balance-to-GDP ratios (CAPB) is in the negative when favourable cyclical conditions (output gap - YGAP) prevail, while discretionary fiscal policy tightens only when adverse cyclical conditions bring the actual deficit close the 3% ceiling.

Table 2

Fig. 9 Fig. 9 EMU countries 2005-2008

Fig. 8 EMU countries 1999-2004

Fig. 7 EMU countries 1999-2008

Fig. 10 OECD-non EMU countries 1999-2008

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "A simple and flexible alternative to the stability and growth pact deficit ceilings. is it at hand?" ?

The authors use a simple theoretical model of a monetary union where myopic discretionary fiscal policies generate excessive debt accumulation in steady state and inefficiently delayed debt adjustment following a shock. By setting a long-term debt target and by raising the political cost associated to deviations from the optimal pace of debt reversal following a shock ̧ institutional design induces the fiscal policymaker to implement unbiased discretionary responses to shocks. This is a completely revised version of CESifo Working Paper n. 1006. The authors wish to thank for very useful comments Enzo Dia and Jacques Melitz. 

Q2. What are the future works in "A simple and flexible alternative to the stability and growth pact deficit ceilings. is it at hand?" ?

21 Note that 0ˆ/1ˆ is a necessary condition for stability, and that the stability condition r 1ˆ can be reinterpreted as a ceiling to the proportion of adjustment shifted onto the future.