Reconciling Stability and Growth: Smart Pacts and Structural Reforms

September 1, 2003

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.

Subject: Budget planning and preparation, Employment protection, Fiscal policy, Labor, Labor market reforms, Macrostructural analysis, Public financial management (PFM), Structural policies, Structural reforms

Keywords: budget constraint, Budget planning and preparation, deficit bias, Employment protection, Europe, incumbent government, Monetary Union, partisan government, public goods, Sanctions, Stability and Growth Pact, Structural policies, Structural reforms, WP

Pages:
34
Volume:
2003
DOI:
https://doi.org/10.5089/9781451858716.001
Issue:
174
Series:
Working Paper No. 2003/174
Stock No:
WPIEA1742003
ISBN:
9781451858716
ISSN:
1018-5941

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