Reconciling Stability and Growth: Smart Pacts and Structural Reforms
September 1, 2003
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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:
Issue:
174
Series:
Working Paper No. 2003/174
Stock No:
WPIEA1742003
ISBN:
9781451858716
ISSN:
1018-5941
