Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the EMU

Robert P. Inman

NBER Working Paper No. 5838 (Also Reprint No. r2173)
Issued in November 1996
NBER Program(s):   PE

The `Excessive Deficit Procedure' of the Maastricht Treaty on Economic and Monetary Union proposes two fiscal convergence conditions for entry and continued membership in the EMU: 1) a country's overall budget deficit for each fiscal year must be equal to or below 3% of GDP, and 2) a country's stock of gross public debt must be equal to or less than 60% of GDP. Will the current EMU Excessive Deficit Procedure work as an effective constraint on countries' deficit behaviors? When understood within the context of a political economy model of deficit behavior, recent U.S. evidence on balanced budget rules strongly suggests that effective deficit constraints must use ex post deficit accounting, must be constitutionally grounded, must be enforced by an open and politically independent review panel or court with significant sanctions for violations, and costly to amend. While ex post, constitutionally grounded, and difficult to amend, current EMU rules are not enforced, at present, by an open and politically independent review panel using significant penalties. The ability of the EMU's deficit procedure to constrain in doubt. Institutional reforms that will strengthen the EMU's balanced budget procedures are discussed.

download in pdf format
   (1735 K)

email paper

An NBER digest for this paper is available.

A non-technical summary of this paper is available in the NBER Bulletin on Aging and Health. You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (1735 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5838

Users who downloaded this paper also downloaded these:
Ferraz and Finan w14937 Electoral Accountability and Corruption: Evidence from the Audits of Local Governments
Alesina and Perotti Budget Deficits and Budget Institutions
Eichengreen and Temin w6060 The Gold Standard and the Great Depression
Alesina and Bayoumi w5614 The Costs and Benefits of Fiscal Rules: Evidence from U.S. States
Poterba w5550 Do Budget Rules Work?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us