Optimal Penalties on Deviations from Budgetary TargetsReport as inadecuate

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Economics Research International - Volume 2014 2014, Article ID 572909, 19 pages -

Research ArticleUniversité Paris Descartes, Sorbonne Paris Cité, 12 Rue de l’École de Médecine, 75270 Paris Cedex 06, France

Received 6 April 2014; Accepted 8 May 2014; Published 2 June 2014

Academic Editor: João Ricardo Faria

Copyright © 2014 Séverine Menguy. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


Beyond traditional arguments justifying the introduction of fiscal rules, this paper analyses their potential contribution to an indirect budgetary coordination between the member countries of a monetary union. Indeed, thanks to appropriate fiscal penalties, the noncooperative and decentralized equilibrium could get closer to the optimal equilibrium where the budgetary authorities cooperate. Our macroeconomic model shows that whatever penalty on the structural budgetary deficit would be optimal in case of asymmetric shocks. A moderate penalty on the excessive indebtedness level would be optimal in “normal times,” or in case of asymmetric shocks if openness to trade and price flexibility are sufficiently high, whereas the share of public consumption in GDP, taxations rates, and indebtedness levels is sufficiently weak in the monetary union. Besides, in case of symmetric shocks, a fiscal penalty would be useful to decrease the excessive budgetary activism, even if it doesn’t allow reaching the optimal and first-best equilibrium. Furthermore, the fiscal penalty should always be an increasing function of the share of public consumption in GDP and of taxation rates but a decreasing function of the strength of automatic stabilizers, of openness to trade, and of price flexibility in the member countries of the monetary union.

Author: Séverine Menguy

Source: https://www.hindawi.com/


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