Rainy Day Funds: Can They Make a Difference in Europe?

22 Pages Posted: 18 Oct 2007

Date Written: September 2007

Abstract

Rainy Day Funds (RDFs) have an important role in the USA. They allow States - which usually have rules requiring a balanced budget for current revenue and spending - to limit pro-cyclical fiscal policies. This paper examines the possible role of RDFs in the European fiscal framework. The analysis suggests that RDFs would not fundamentally alter the incentive problems at the root of the difficulties in the implementation of the Stability and Growth Pact. Moreover, RDFs are not an option for countries with high deficits. However, for low-deficit countries, RDFs can lessen the rigidity of the 3 per cent threshold in bad times. RDFs could be introduced on a voluntary basis at the national level and could contribute to make the rules more country-specific. The introduction of RDFs would require a change in the definition of the "Maastricht deficit": deposits and withdrawals should be considered respectively as budget expense and revenue. In this way, the balances held in RDFs could be spent in bad times without an increase in the deficit. To ensure that RDFs are not used opportunistically, deposits should only be made out of budget surpluses and circumstances allowing withdrawals should be specified ex ante.

Keywords: rainy day funds, fiscal rules, EMU

JEL Classification: H30, H61, H62

Suggested Citation

Franco, Daniele and Balassone, Fabrizio and Zotteri, Stefania, Rainy Day Funds: Can They Make a Difference in Europe? (September 2007). Bank of Italy Occasional Paper No. 11, Available at SSRN: https://ssrn.com/abstract=1022561 or http://dx.doi.org/10.2139/ssrn.1022561

Daniele Franco (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 06 4792 2793 (Phone)
+39 06 4792 2324 (Fax)

Fabrizio Balassone

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Stefania Zotteri

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
725
rank
392,026
PlumX Metrics