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European Competitiveness; Europe
Fatas A., Mihov I. (2003). On Constraining Fiscal Policy Discretion in the EMU Oxford Review of Economic Policy, 19(1), pp. 112-131.
In this paper the authors consider several arguments in the debate on constraining fiscal policy discretion. The key arguments against discretion are based on the observation that there are at least three types of policy abuse by governments: (a) excessive deficits; (b) unwarranted increase in policy volatility; and (c) procyclicality of fiscal policy.The obvious problem with any restriction on fiscal policy is such that mechanistically they constrain also the functioning of the automatic stabilizers. The authors argue that the correct way of restricting policy is not by imposing quantitative targets as in the Stability and Growth Pact, but it is by building an institutional structure with checks and balances.Nevertheless if they compare the Stability and Growth Pact to a regime with no restrictions at all then they conclude that the pact does provide some protection against the undesirable consequences of policy discretion.