Reconciling Stability and Growth : Smart Pacts and Structural Reforms

Author/Editor:

Roel M. W. J. Beetsma ; Xavier Debrun

Publication Date:

September 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. The model shows that a pact may harm structural reforms, sacrificing future growth for present stability. The welfare gains brought about by a pact depend on a trade-off between the reduction in the deficit bias and the induced reduction in the amount of structural reform. A pact becomes more attractive (“smarter”) if it takes into account the fiscal impact of structural reforms, in line with a recent proposal by the European Commission.

Series:

Working Paper No. 03/174

Subject:

English

Publication Date:

September 1, 2003

ISBN/ISSN:

9781451858716/1018-5941

Stock No:

WPIEA1742003

Format:

Paper

Pages:

34

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