Fiscal Policy in Economic and Monetary Union

Fiscal Policy in Economic and Monetary Union

Theory, Evidence and Institutions

Marco Buti and Daniele Franco

This book explores the origins, rationale, problems and prospects of the European fiscal policy framework. It provides the reader with a roadmap to EMU’s budgetary framework by exploring its theoretical and empirical foundations, uncovering its historical roots and emphasising its supranational nature.

Chapter 10: Fiscal Rules and Statistics

Marco Buti and Daniele Franco

Subjects: economics and finance, money and banking, public finance


* INTRODUCTION The pros and cons of fiscal rules have long been debated.252 On the one hand, fiscal rules are seen as a prevention device against opportunistic behaviour by policy makers and sharp discontinuities in public policies. On the other hand, rules are seen as a source of unnecessary rigidity in the budgetary process leading to sub-optimal outcomes.253 From the debate a trade-off emerged between enforceability and flexibility. Enforceability increases with the simplicity of a rule whereas flexibility decreases with it. Neither extremely complex nor extremely simple rules are desirable. In principle, the former can minimize distortions but are difficult to enforce; the latter are easy to enforce but do not take into account all factors which are important to policy-making. The effectiveness of rules crucially depends on the indicators they refer to. Not only has the indicator to be relevant in view of the purpose of the rule, it also has to be based on a transparent and unambiguous operational and statistical framework. This issue has not been adequately dealt with in the discussion on fiscal indicators, particularly in the EMU context. A vast literature stresses that the evaluation of all aspects of fiscal policy (e.g. macroeconomic effects, size of discretionary policy measures, impact on national savings, fiscal sustainability) cannot be based on a single indicator. The analysis of each aspect of fiscal policy is best conducted with reference to a specific indicator.254 Experience highlights the possibility that policy-relevant indicators can be manipulated. It also points...

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