Fiscal Delegation in a Monetary Union: Instrument Assignment and Stabilization Properties

62 Pages Posted: 28 Mar 2017

See all articles by Henrique S. Basso

Henrique S. Basso

Banco de España

James S. Costain

Banco de España - Research Department

Date Written: March 28, 2017

Abstract

Motivated by the failure of fiscal rules to eliminate deficit bias in the euro area, this paper analyzes an alternative policy regime in which each Member State government delegates at least one fiscal instrument to an independent authority with a mandate to avoid excessive debt. Other fiscal decisions remain in the hands of member governments, including the allocation of spending across different public goods, and the composition of taxation. We study the short-and long-run properties of dynamic games representing different institutional configurations in a monetary union. Delegation of budget balance responsibilities to a national or union-wide fiscal authority implies large long-run welfare gains due to much lower steady-state debt. The presence of the fiscal authority also reduces the welfare cost of fluctuations in the demand for public spending, in spite of the fact that the authority imposes considerable “austerity” when it responds to fiscal shocks.

Keywords: independent fiscal authority, delegation, decentralization, monetary union, sovereign debt

JEL Classification: E61, E62, F41, H63

Suggested Citation

Basso, Henrique S. and Costain, James S., Fiscal Delegation in a Monetary Union: Instrument Assignment and Stabilization Properties (March 28, 2017). Banco de Espana Working Paper No. 1710, Available at SSRN: https://ssrn.com/abstract=2942118 or http://dx.doi.org/10.2139/ssrn.2942118

Henrique S. Basso (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

James S. Costain

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

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