Working Paper: CEPR ID: DP4647
Authors: Sylvester C. W. Eijffinger; Matteo Governatori
Abstract: The Paper builds a simplified model describing the economy of a currency union with decentralized national fiscal policy, where the main features characterizing the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules of the Stability and Growth Pact on public finance. Unlike previous literature the asymmetric working of those rules is explicitly modeled in order to identify its impact on the Nash equilibrium of deficits arising from a game of strategic interaction between fiscal authorities in the union.
Keywords: Asymmetric fiscal rules; Decentralized fiscal policy; EMU; Stability and Growth Pact
JEL Codes: E61; H30; H60; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| national deficits (H62) | output gaps (E23) |
| deficit threshold (H62) | fiscal behavior (E62) |
| sanctions (F51) | fiscal behavior (E62) |
| output gap (E23) | inflation expectations (E31) |
| total deficits (H62) | inflation rate (E31) |
| weighted average of deficits (H62) | output gap (E23) |