Working Paper: CEPR ID: DP17577
Authors: Marco Buti; Marcello Messori
Abstract: A central fiscal capacity (CFC) in the European Union (EU) can in principle perform three roles: provide cyclical stabilisation, support national reforms and investment, and deliver European Public Goods. We build a simple aggregate demand - aggregate supply model, where a CFC depends on shocks and degrees of compliance with common fiscal rules. This analytical framework allows us to examine the policy implications of the three options for a CFC. Based on both the theoretical analysis and the EU’s experience in handling the global financial crisis and the pandemic, we show that a CFC would improve policy efficiency by focusing on stabilisation in the event of negative demand shocks and on boosting potential output in the event of negative supply shocks. In the current stagflationary environment, the provision of European Public Goods appears to be the most promising avenue. The need to calibrate the central interventions in relation to the typology of shocks implies that a CFC cannot be put on an automatic pilot. CFC calls for a reform of the euro-area institutional set up, including the creation of a European Minister for Economic Affairs in charge of the “vertical coordination” of the EU’s and national budgets and the calibration of the centralised expenditures.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central fiscal capacity (CFC) (H77) | policy efficiency (D61) |
| central fiscal capacity (CFC) (H77) | stabilization during negative demand shocks (E63) |
| central fiscal capacity (CFC) (H77) | potential output (E23) |
| central fiscal capacity (CFC) (H77) | national structural reforms (E69) |
| central fiscal capacity (CFC) (H77) | economic dynamism (O49) |
| central fiscal capacity (CFC) (H77) | compliance with common fiscal rules (E62) |
| central fiscal capacity (CFC) (H77) | avoid fiscal dominance (E62) |
| central fiscal capacity (CFC) (H77) | mitigate adverse effects of negative demand shocks (E00) |