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.

Breaking the stability pact: was it predictable? / Cristini, Annalisa; Bonatti, Luigi. - ELETTRONICO. - (2007), pp. 1-31.

Breaking the stability pact: was it predictable?

Bonatti, Luigi
2007-01-01

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.
2007
Trento, Italia
Università degli Studi di Trento. Dipartimento di Economia
Breaking the stability pact: was it predictable? / Cristini, Annalisa; Bonatti, Luigi. - ELETTRONICO. - (2007), pp. 1-31.
Cristini, Annalisa; Bonatti, Luigi
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11572/357876
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