Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility, Issues 2005-2059
International Monetary Fund, Mar 1, 2005 - Business & Economics - 34 pages
The paper analyzes some key policy trade-offs involved in the implementation of the Stability and Growth Pact. Greater "procedural" flexibility in the Pact's implementation may improve welfare. Procedural flexibility designates the enforcer's room to apply judgment on underlying policies and to set a consolidation path that does not discourage high-quality measures. Budgetary opaqueness may hinder the qualitative assessment of fiscal policy; therefore, better monitoring and greater transparency would increase the benefits from procedural flexibility. Overall, a simple deficit rule with conditional procedural flexibility can contain excessive deficits, lower unproductive spending, and increase high-quality outlays.
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Optimal Pact Under Budgetary Transparency and No PorkBarrel
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adjustment ambitious reform Appendix assume baseline Beetsma and Debrun benefits budgetary opaqueness budgetary transparency creative accounting db/dk deficit bias disciplinary effect disutility effect of enforcing effect of reforms Effects of Introducing enforcement and procedural enforcing sanctions equilibrium European European Commission excessive deficits expected utility extend waivers first-period fiscal framework fiscal policy flexible implementation following proposition greater procedural flexibility Growth Pact high-quality outlays high-quality spending impact implementation procedure introducing procedural flexibility linear sanction scheme marginal cost Marginal Effects marginal utility marginal welfare effect nonpoliticized Pact's parameter combinations partisan government period policymakers pork-barrel programs pork-barrel spending private consumption public good provision quality of fiscal re-election reduces the deficit reform-enhancing sanctions against excessive second-period set of first-order SNA's social welfare socially-optimal Stability and Growth stability pact status quo bias stricter enforcement strictness of enforcement structural policies structural reforms trade-off unproductive spending unrestricted procedural flexibility