Fiscal Indulgence in Central Europe: Loss of the External Anchor
IMF Working Papers, April 1, 2004
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- Fiscal Indulgence in Central Europe: Loss of the External Anchor
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Bibliographic details
- Authors: George Kopits, Helge Berger, Istvan P Szekely
- Published: April 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848311.001
Summary
- In recent years, fiscal performance in Central Europe has steadily deteriorated, in contrast to the improvement in the Baltics.
- The paper explores the determinants of differences in fiscal performance among countries slated for EU accession.
- Regression estimates suggest that economic and institutional fundamentals do not provide a full explanation for the observed divergence.
- An alternative explanation lies in the political economy of the accession process.
- A game-theoretic model illustrates why a country with a stronger bargaining position might have an incentive to deviate from convergence to the Maastricht criteria.
- The model generates alternative fiscal policy regimes—allowing for regime shifts—depending on country characteristics and EU policies.
Key findings and themes
- Divergent fiscal performance between Central Europe and the Baltics, with Central Europe deteriorating and the Baltics improving.
- Economic and institutional fundamentals alone are insufficient to explain cross-country differences revealed by regression estimates.
- Political economy factors tied to the EU accession bargaining process can create incentives to deviate from Maastricht-convergence paths.
- Game-theoretic modeling produces multiple fiscal policy regimes and potential regime shifts contingent on:
- country characteristics
- EU policies
Methodology and analytical approach
- Use of regression estimates to evaluate the explanatory power of economic and institutional fundamentals.
- Development and application of a game-theoretic model to analyze incentives arising from the accession bargaining process and their implications for fiscal policy regimes.
Subject areas and keywords
- Subject: Conventional peg, Exchange rate arrangements, Fiscal policy, Fiscal stance, Foreign exchange, Government debt management, Public financial management (PFM)
- Keywords: Baltics, Conventional peg, EU accession, EU economic and monetary union, EU institution, EU membership, EU policy change, EU policy position, EU position, Europe, exchange rate, Exchange rate arrangements, Fiscal policy, Fiscal stance, game-theoretic approach, Government debt management, political economy, WP