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EMU: Optimal Fiscal Strategy and the Punishment Effectiveness
Author(s) -
Vranceanu Radu,
Warin Thierry
Publication year - 2001
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00295
Subject(s) - sanctions , economics , punishment (psychology) , stability and growth pact , context (archaeology) , punitive damages , pareto principle , pact , microeconomics , international economics , member states , european union , operations management , psychology , law , social psychology , paleontology , political science , biology
This paper investigates the ability of the Stability and Growth Pact to prevent governments in the “euro zone” from running excessive budget deficits. It is shown that in a static two‐country game, the Pareto‐optimal strategy of no excess deficits cannot be systematically enforced, whatever the toughness of the sanction under the Pact. However, in a multiperiod setting, the Pareto‐optimal configuration of no excess deficits would prevail even if no sanctions were applied to deviant governments. In this case, neither a heavily punitive SGP, nor a centralized budget appears to be helpful in the EMU context.