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| Author: | Beetsma, R. Jensen, H. |
| Title: | Contingent deficit sanctions and moral hazard with a stability pact |
| Journal: | Journal of International Economics
2003 : OCT, VOL. 61:1, p. 187-208 |
| Index terms: | Monetary policy Fiscal policy Economic stability Moral hazard Recession Debt |
| Language: | eng |
| Abstract: | The authors show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification. Moreover, with sactions contingent on the observed state of the economy, the pact avoids aggravating the situation of the country in recession. Moral hazard problems arise if the state also depends on unobservable, politically costly fiscal effort. This could ecplain why sanctions under the actual Stability and Growth Pact are only automatically waived in extreme recessions and why the procedure linking observed deficits and sanctions involves a long and detailed assessment of a country's situation. |
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