Working Paper: NBER ID: w7278
Authors: Alessandra Casella
Abstract: Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation. The scheme exploits countries' incentives to minimize their costs, is transparent, flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions. In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run.
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 |
|---|---|
| tradable deficit permits (F16) | efficient fiscal discipline (E62) |
| tradable deficit permits (F16) | minimize costs associated with maintaining fiscal discipline (H69) |
| tradable deficit permits (F16) | flexibility for individual countries (F55) |
| higher debt-to-GDP ratios (H69) | penalize countries (F18) |
| penalize countries (F18) | incentivize better fiscal behavior (H39) |
| tradable deficit permits (F16) | align individual country behaviors with collective fiscal goals (F42) |