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Journal articles (2001), Review of International Economics, pp. 494-504

EMU: Optimal Fiscal Strategy and the Punishment Effectiveness

VRANCEANU Radu , WARIN T.

This paper investigates the ability of the Stability and Growth Pact to prevent governments in the "euro zone" from running excessive budget deficits. It is shown that in a static two-country game, the Pareto-optimal strategy of no excess deficits cannot be systematically enforced, whatever the toughness of the sanction under the Pact. However, in a multiperiod setting, the Pareto-optimal configuration of no excess deficits would prevail even if no sanctions were applied to deviant governments. In this case, neither a heavily punitive SGP, nor a centralized budget appears to be helpful in the EMU context.

VRANCEANU, R. and WARIN, T. (2001). EMU: Optimal Fiscal Strategy and the Punishment Effectiveness. Review of International Economics, pp. 494-504.