Reconciling Stability and Growth Smart Pacts and Structural Reforms

Beetsma, Roel M. W. J.; Debrun, Xavier

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Reconciling Stability and Growth Smart Pacts and Structural Reforms

IMF Working Paper No. 03/174

34 Pages Posted: 3 Feb 2006

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Xavier Debrun

International Monetary Fund (IMF) - Research Department

There are 2 versions of this paper

Date Written: September 2003

Abstract

This paper analyzes the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. The model shows that a pact may harm structural reforms, sacrificing future growth for present stability. The welfare gains brought about by a pact depend on a trade-off between the reduction in the deficit bias and the induced reduction in the amount of structural reform. A pact becomes more attractive (smarter) if it takes into account the fiscal impact of structural reforms, in line with a recent proposal by the European Commission.

Keywords: Structural reforms Stability and Growth Pact Monetary Union Sanctions

JEL Classification: E42 E61 F33

Suggested Citation: Suggested Citation

Beetsma, Roel M. W. J. and Debrun, Xavier, Reconciling Stability and Growth Smart Pacts and Structural Reforms (September 2003). IMF Working Paper No. 03/174, Available at SSRN: https://ssrn.com/abstract=880228