A Fiscal Rule That Has Teeth: A Suggestion for a ‘Fiscal Sustainability Council’ Underpinned By the Financial Market

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Title:A Fiscal Rule That Has Teeth: A Suggestion for a ‘Fiscal Sustainability Council’ Underpinned By the Financial Market
Creators:
Hedbávný, Petr
Schneider, Ondřej
Zápal, Jan
Journal or Publication Title:
AUCO Czech Economic Review, 1, 1, pp. 32-54
Uncontrolled Keywords:fiscal policy, European Union, sustainability

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 evelopments. 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.

Official URL: http://www.ceeol.com/aspx/issuedetails.aspx?issueid=8D4101D5-8C79-4EAF-B226-7B0C366B93DB&articleid=3E61F45E-216D-431D-9E3C-4B3F7EDF9B3C

Title:A Fiscal Rule That Has Teeth: A Suggestion for a ‘Fiscal Sustainability Council’ Underpinned By the Financial Market
Creators:
Hedbávný, Petr
Schneider, Ondřej
Zápal, Jan
Uncontrolled Keywords:fiscal policy, European Union, sustainability
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
H Social Sciences > HF Commerce
Divisions:Section of external journals > AUCO Czech Economic Review
Journal or Publication Title:AUCO Czech Economic Review
Volume:1
Number:1
Page Range:pp. 32-54
ISSN:1802-4696
Publisher:Charles University
Related URLs:
URLURL Type
http://auco.cuni.czPublisher
http://avi.lib.cas.cz/node/183Publisher
ID Code:4299
Item Type:Article
Deposited On:01 Jun 2009 18:32
Last Modified:01 Jun 2009 16:32

Citation

Hedbávný, Petr; Schneider, Ondřej; Zápal, Jan (2007) A Fiscal Rule That Has Teeth: A Suggestion for a ‘Fiscal Sustainability Council’ Underpinned By the Financial Market. AUCO Czech Economic Review, 1 (1). pp. 32-54. ISSN 1802-4696

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