Breaking the stability pact: was it predictable?

Bonatti, Luigi and Cristini, Annalisa (2007) Breaking the stability pact: was it predictable? UNSPECIFIED.

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    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.

    Item Type: Departmental Technical Report
    Department or Research center: Economics
    Subjects: UNSPECIFIED
    Uncontrolled Keywords: fiscal policy, policy coordination, capital formation, free-riding, short-termism
    Additional Information: Pubblicazione registrata presso il Tribunale di Trento.
    Report Number: 14
    Repository staff approval on: 21 Nov 2007

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