NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tradable Deficit Permits: Efficient Implementation of the Stability Pacin the European Monetary Union

Alessandra Casella

NBER Working Paper No. 7278
Issued in August 1999
NBER Program(s):   IFM   ITI

Borrowing from the experience of environmental markets, this paper proposes a system of tradable deficit permits as an efficient mechanism for implementing fiscal constraints in the European Monetary Union: having chosen an aggregate target for the Union and an initial distribution of permits, EMU countries could be allowed to trade rights to deficit creation. The scheme exploits countries' incentives to minimize their costs, is transparent, flexible in accommodating idiosyncratic shocks and allows for adjustments in case of Europe-wide recessions. In addition, it need not treat all countries identically and can be designed to penalize countries with higher debt to GDP ratios. Finally, the scheme rewards countries for reducing their deficit below the initial allowance, lending credibility to the Stability Pact's goal of a balanced budget in the medium run.

download in pdf format
   (185 K)

email paper

This paper is available as PDF (185 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7278

Published: Economic Policy, Vol. 29 (October 1999): 323-361.

 
Publications
Activities
Meetings
Data
People
About

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

Contact Us